Historic turning point for gold and silver

A frustrating reality of gold and silver pricing is that it can be so influenced by futures trades on COMEX by so called managed money / technical funds or often called American Speculators.  It’s frustrating because these guys can sell up big, expanded further by high leverage, and all with not an ounce of gold or silver to their name.  We saw this in its starkest glory in April/May 2013 when we saw both COMEX and ETF’s spark a market rout.  You see these speculators have ‘learned’ that the only show in town is shares on the back of continual money printing and zero interest rate stimulation.  It’s no coincidence the 2013 rout happened just after the open ended $85b/month QE3 money printing program was announced.   

The thing with these guys though is that when they go short they are selling something they don’t yet own.  This is great when done en mass as it is a self fulfilling prophecy as it drives down the price.  However given they are speculators without metal and highly leveraged, when the price turns they need to quickly cover their contracts by buying and you get a ‘short covering’ spike in price.  The graph below is very busy but simple if you remove the noise.  The blue line is the gold price, the red line the number of speculators’ short contracts and the green line the number of speculators’ long contracts.  See the pattern?  After shorts peak you inevitably get a short covering rally.  The bigger the peak the bigger the rally.  Whilst the graph shows gold nearing a peak, the bigger news at the moment is that silver is through the roof.  So one little trigger for an unexpected rise – like say, you know, a Greek default – and it can trigger an epic short covering rally.

But don’t just take out word for it – here’s what the guru of silver futures, Ted Butler, had to say this weekend after the latest COT report same out:

“What’s good is that the technical fund traders in the managed money category are the weakest short sellers of all because they can’t possibly deliver actual metal to close out their short positions and, therefore, must buy back at some point. Besides, history shows these traders always cover in unison as soon as the moving averages are penetrated to the upside and simply mathematics dictate the moving averages must be penetrated at some point. This guarantees (there are not many guarantees in life) that all these metals will rally in price when the managed money shorts buy back their short positions.”