What Most Gold Bugs Don’t Understand

Posted On Apr 1, 2016 By Dave Gonigam

  • Short-term gold outlook: After a stealth rally, now what?
  • Long-term gold outlook: Revisiting the “Zero Hour” scenario
  • Rickards on what many gold bugs don’t understand about the gold market
  • Why the job numbers mean nothing as far as the Fed’s concerned
  • Stupid April Fools’ tricks… government versus the real world… Obama’s “legacy” in jeopardy… and more!

“There’s mounting evidence this gold rally could have legs heading into the summer,” says Greg Guenthner of our trading desk.

If you’re a longtime reader, you’ll remember Greg called gold’s bear market in February 2013 — as the Midas metal broke below the $1,650 level. If you’re a really longtime reader, you might’ve been among those who hurled a torrent of insults Greg’s way — “Antichrist” was the most memorable.

But Greg’s approach to every asset class is the agnostic one. When the charts turn, he turns.

“No one was paying attention when gold started ticking higher in January,” Greg writes by way of update this morning. “A false breakdown at the very end of 2015 is what caught everyone off guard.”

“Gold was locked in a nasty downtrend. Another breakdown was just par for the course.

Left for Dead

“As most folks proficient in the ‘chart arts’ know, from false moves come swift moves in the opposite direction. Once gold regained its footing to start the year it was off to the races. The disbelief rally had begun. And it’s still going strong.”

Going forward, Greg sees dual catalysts for gold as spring moves toward summer — dollar weakness and a growing realization the Federal Reserve has no clue what it’s doing (about which more shortly).

“Gold’s rise won’t be picture-perfect,” he concludes. “Expect wild swings and plenty of shakeouts. Comeback moves are never clean or easy. But they are powerful.”

But what of the “ultimate” catalyst for gold, an X-factor we identified in early 2013 even as gold was nose-diving?

Back then, we described the potential for a scenario our executive publisher Addison Wiggin labeled “Zero Hour” — a moment when demand for physical metal would far outstrip the “paper gold” market of gold futures traded on the Comex in New York.

Since 2014, the momentum toward “Zero Hour” has been building relentlessly. Only last month, Byron King explained in this space that for every ounce of physical metal held by the Comex, there are 500 traders holding gold futures.

For the time being, those traders are content to roll their contracts forward or take a cash payout when those futures expire. But hypothetically, they have the right to demand delivery in physical metal.

The key word there is “hypothetically.” A lot of Internet screamers don’t understand the subtleties of “Zero Hour.” A lot of their followers wonder what the hell’s taking so long.

“For years, gold bugs implored futures traders to ‘stand for delivery’ on the Comex,” says Jim Rickards.

“If every long in the futures market put in a notification that they wanted to take physical delivery instead of closing out or rolling over their contracts, the result would be one of the greatest short squeezes and price spikes since ‘Big Jim’ Fisk and Jay Gould tried to corner the private gold market in 1869. (Fiske and Gould’s corner failed when the U.S. Treasury unexpectedly made public gold available to bail out the shorts.)

“But this scenario is unlikely to play out in the way the gold bugs wish, for several reasons,” Jim goes on.

“The first is that the Comex has emergency powers to prevent longs from taking delivery in a way that disrupts the orderly functioning of the market. The Comex rule book makes it clear that a futures exchange is for hedging, price discovery and legal speculation, but is not a source of supply. (Physical delivery is permitted, but only enough to keep the paper price ‘honest.’ The irony, of course, is that the paper price is anything but honest, due to manipulation.)

“Another rule allows Comex officials to change the rules as needed in emergencies (something the Hunt brothers experienced when they tried to corner the silver market in 1980). The fact that longs know they cannot take delivery in the end is a major deterrent to the attempt.”

There’s one more reason the gold longs don’t squeeze the gold shorts. Jim sums it up in two words: “It’s illegal.”

“Most major participants in the gold market (banks, dealers and hedge funds) are regulated by one or more of the Federal Reserve, U.S. Treasury, SEC or CFTC,” he explains. (And he’s been a lawyer for banks, dealers and hedge funds, so he’d know.)

“Applicable laws contain strict anti-fraud and anti-manipulation rules, including jail time in cases of willful and knowing violations.”

So a rogue hedge fund manager out there might want to call BS on the whole Comex scheme… but he thinks better of it, lest the full weight of Uncle Sam’s prosecutorial apparatus comes crashing down on him.

If someone demanding delivery of physical metal from the Comex doesn’t bring on “Zero Hour,” what will?

It comes back to “avalanche theory” — Jim’s popularization of the science called complexity theory.

“A single snowflake,” he reminds us, “can turn a seemingly stable snowpack into a roaring avalanche that destroys everything in its path. Once the snowpack is arranged in an unstable way (like the gold market today), a single snowflake can unleash carnage. Of course, a single snowflake is so small you never see it coming.

“What this means is that the super-spike in gold prices will not come from any of the obvious sources but from an unexpected source.”

It could be the bankruptcy of a medium-size gold dealer. It could be lawmakers in Washington talking about new reporting requirements for gold dealers. Or it could have nothing to do with gold: It could be a war or a pandemic that frightens people into safeguarding wealth.

“It doesn’t matter,” Jim sums up. “Once the avalanche begins, there’s no stopping it.

“At that point, the hedge funds can demand physical delivery of gold without fear of prosecution. If a hedge funds tries to start an avalanche, it’s manipulation. But if the avalanche starts from another source, then a hedge fund piling on is ‘normal’ market conduct.

“Since every gold market participant knows there’s not enough physical gold to go around, everyone will demand physical gold at once. No one wants to be left holding the bag.”

As it happens, one of Jim’s contacts in the gold market — the head of the world’s largest gold refinery, located in Switzerland — has identified a potential near-term Zero Hour catalyst. “I know of no single individual in the world with a more detailed working knowledge of physical gold flows,” Jim says.

This coming Tuesday, Jim is holding an online workshop exclusively for people who buy a copy of his latest book, The New Case for Gold through Agora Financial. Jim will share the insights of this insider’s insider. “When the buying panic hits, gold will soar past $2,000 per ounce (if it’s not there already) and spike to $3,000 per ounce, then higher, in a matter of weeks or months at most.”

This workshop is one of many pluses you get by ordering The New Case for Gold through us. Your hardcover copy of the book will have a bonus chapter. It will be signed by Jim. You’ll get a 60-day no-obligation trial of Rickards’ Strategic Intelligence. And all we ask is $4.95 to cover shipping for the book — less than a third of what you’d pay buying the book from Amazon, and you get none of those bonuses.

[Time-sensitive announcement: This offer comes off the table Monday night at midnight, because the book’s formal publication date is Tuesday. If you want in, time is limited. Here’s where to act.]

To the markets, which are reacting to two of the month’s big economic numbers.

Gold face-planted $20 the moment the March job figures were released — which we’ll get to shortly. But at $1,213, it’s still comfortably holding the line on $1,200.

The Dow spilled 100 points on the open, but has since recovered to a 35-point gain at 17,719. The S&P is flat at 2,060.

For once, stocks and oil aren’t moving in tandem — crude is off more than 3%, barely holding the line on $37, after the latest rumor of a coordinated OPEC-Russian production agreement fizzled.

The job numbers were, frankly, a snooze: 215,000 new jobs conjured by wonks at the Bureau of Labor Statistics, a bit more than the “expert consensus” was counting on.

The unemployment rate moved up a bit to 5.0% because people who’d given up looking for work a while back are looking once again. So as far as the government’s concerned, they’re part of the workforce again. Average hourly earnings bumped up 0.3%, also a plus.

The real-world unemployment rate calculated by John Williams at ShadowStats.com also ticked up — to 22.9%.

Meanwhile, the U.S. factory sector is growing again, judging by this morning’s ISM Manufacturing Index.

After five straight months of sub-50 figures indicating a shrinking factory sector, the March number rings in at 51.8. Even better, the growth is fueled by a surge in new orders.

“Future rate hikes are now a jump ball,” says Jim Rickards. “They may happen; they may not.”

What, you thought the numbers today would create more certainty about Federal Reserve policy? C’mon!

Jim says the big takeaway from Fed chair Janet Yellen’s Very Important Speech on Tuesday is that she’s come under the spell of the Fed’s most “dovish” members, like Chicago Fed chief Charles Evans.

In that context, “employment metrics are no longer highly relevant,” says Jim. “Job creation has been strong for months. If that’s not enough to get the Fed to move, then it’s not clear why another strong jobs report today would make any difference.”

Meanwhile, “Yellen will not believe inflation is a threat until she sees the whites of its eyes. That could be a long time coming. As for markets, it’s back to bubble-land and risk-on trades in emerging markets, emerging-market currencies, gold and TIPS.

“Markets get relief for now, but the bubble machine is in overdrive. When this bubble bursts, it will make 2008 look like elementary school recess.” Will you be ready?

Memo to the folks at Yahoo!: If you’re going to post an April Fools’ story from one of your many “partner” websites, make sure you’re not doing it a day early.

Trader Joes

Not only was it mistimed, it was neither credible nor funny.

Fear not, urbanite readers, TJ’s isn’t going anywhere. Your three-buck-Chuck is safe (where available, that is; not here in Maryland with its Byzantine alcohol laws).

“You know, I am a project manager by trade,” writes one of our regulars who caught our item yesterday about the government’s $87 million spy plane that’s never flown a mission. Part of the problem was the DEA’s budgeting didn’t allow for operating costs like pilots and spare parts.

“If I had done 1% of the ignorance as the above as — say — a junior project manager just managing a single project installing 10 toilet seats, I would have been fired in 10 minutes. Your gov’t tax dollars at work.”

“I haven’t heard about where you are with the potential outcome of the Trans-Pacific Partnership in the United States,” writes the Canadian reader who told us earlier this week that The 5 and the Laissez Faire Letter are his sole sources of news.

“I watched something on YouTube on how much Obama is pressing for the TPP — more so than he ever did for Obamacare. Here in Canada, there is absolutely no conversation about it.”

The 5: We’ve written periodically about TPP, most recently in November. It’s an awful thing that, like most such agreements, gives “free trade” a bad name.

We understand whatever “legacy” President Obama hopes to leave behind hinges on Congress passing it this year. But with the Trump-Sanders zeitgeist out there, it might not have a prayer. We’ll count our blessings where we can find them…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. Did you know about Jim Rickards’ “mystical” gold-buying formula? Use this formula and you’ll know how much to buy.

“Whether you have $5,000 or $5 million,” says Jim, “follow this simple formula and you’ll be more than ready to weather the coming storm.”

That’s one of many nuggets you’ll find in The New Case for Gold — Jim’s book set for publication next Tuesday.

Through midnight next Monday, you can get a free copy through us — it’ll be signed by Jim and contain a bonus chapter. You’ll also have access to Jim’s live online workshop on Tuesday identifying a “Zero Hour” catalyst for gold’s next big move. Just spot us $4.95 for shipping and handling and we’ll have the book on its way to your door.


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