Short term alert

Dire economic news, Goldman Sachs returning to net short gold on TOCOM and the relatively poor performance last week of key gold stocks such as Newmont suggest gold many be in for a rough week. As Bill Murphy from GATA says gold takedowns almost occur when economic, political or market news is bad. The cartel cannot let gold be seen to perform its traditional safe haven role.

Speaking of bad news take a look at the chart of JP Morgan. This chart is ugly. Something is about to break in a big way for JPM. Could the US governments pet bank bank be about to implode due to its multi trillion dollar derivatives exposure?

JP Morgan weekly chart (Click on image for larger view)


Don't be surprised to see the stock market melt down into Obamas inauguration. He needs panic to sell his fiscal and monetary policy.


Expanding on the short term risk to gold here's Ted Butlers take on COT structure:

Most factors that appear to influence gold (and silver) prices seem to be favorably aligned, particularly physical investment demand. However, there has been notable deterioration in one previously important pricing force - the market structure of the COMEX gold futures market, as defined by the Commitment of Traders Report (COT). I am not making any short term price predictions, I am just analyzing the data.

Over the past one and two months, there has been significant speculative buying and dealer selling in COMEX gold futures. Since the COT of November 11, speculators have bought and dealers have sold 80,000 gold contracts net (8 million ounces), on a $180 rise in the price of gold. And 55,000 contracts (5.5 million ounces) of that total have come since the COT of December 9. By way of comparison, the world’s publicly traded ETF’s, perhaps the leading long-term investment force in gold, added 8 million ounces over the past 12 months. While ETF buying represents physical buying and COMEX gold futures represents paper trading, the speculative buying of such quantities of paper contracts has been the primary driver of the gold price rise over the past two months.

History has shown that when the speculators are done buying, the commercials will engineer prices lower and induce the speculators to liquidate at some point. This is the heart of the manipulation. The key question is when will the speculators be harvested? (Or alternatively, will the dealers be overrun for the first time?) I don’t know when that point will come (or if it will come). I’m not trying to be evasive. There have been times when levels equal to current gold COT readings have resulted in big sell-offs, such the recent top in Sept/Oct 2008, in which gold fell more than $200 an ounce. There have been other times when the opposite has occurred, such as September of 2007, when in spite of COT readings worse than now, gold embarked on a six month, $300 additional rally before eventually surrendering all the gains.

Skeptics might counter that such varied outcomes invalidate the premise behind the COTs. They may have a point insofar as making precise future price predictions. I think the real value of the COTs lies in the explanation for why prices move dramatically and for proving manipulation. Here, the behavior of dealers is instructive. Once they establish a big short position, they never buy back their shorts. Their group action is so orchestrated and collusive that it cannot be attributed to free market behavior. While prices rise they continue to hold, no matter how high prices. They wait it out until they can manipulate prices lower. Then they buy back at the lower prices and profit. They can only do this because they completely control and dominate the market.

The COT structure in silver has not deteriorated near as much as gold. Then again, silver’s price action has not been as robust as gold’s. That’s one of the perverse anomalies about the COTs, namely, the better the price action, the worse the deterioration. Normally, given the relative size of each market, COMEX gold is roughly three times larger than the silver market in terms of contracts of open interest and the net commercial COT changes. In the past one and two months, silver’s COT net commercial changes have been running at one-tenth of gold’s changes, and not a more normal one-third. Whereas the commercials added 80,000 gold contracts net short over the past two months, they "only" added 8,000 silver contracts net short. In simple terms, this means that there are fewer speculative long contracts to liquidate in silver than there are in gold.

In addition, as indicated in the just-released Bank Participation Report for January, two or three U.S. banks have increased their gold net short position to levels matching the extremes of the August report, some 80,000 contracts (8 million ounces), or 10% of world annual mine production. It’s not like you have to look far to find the manipulators in gold or silver.

Enough Is Enough