VIEWPOINTS OF A COMMODITY TRADER

 

According to Jeff Clarke of Casey’s Gold and Resource Report, central banks are net buyers of gold for first time in 22 years. “Precious-metals research firm GFMS reports central banks around the world bought more gold in the second quarter than they sold for the first time since 1987. And consider this: The amount of gold France will sell this year: zero. The amount of gold Germany will sell this year: zero. The amount of gold Switzerland will sell this year: zero.”

 

 

 

 

 

 

 

“So let’s get this straight” Jeff said, “China and Russia are buying gold, several European countries have ceased selling their gold, and central banks are net buyers. Wall Street is also piling into gold. John Paulson, the most successful money manager of 2008, has made a $4.3 billion bet on gold and gold stocks. David Einhorn, Paul Tudor Jones, and Jim Rogers have all purchased gold this year, too.”

Other bullish factors include:

Gold output has been falling by roughly 1m ounces a year since the start of the decade according to Aaron Regent, president of the Canadian gold giant. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run. “Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore,” he said. “Ore grades have fallen from around 12 grams per ton in 1950, to 3 grams in the US, Canada, and Australia. South Africa’s output has halved since peaking in 1970. Some companies, like Harmony Gold, are closing some mines due to poor ore grades.”

India’s central bank is buying up half of the gold being sold by the International Monetary Fund. It is the latest sign that Asia and India are growing wary of Western paper money and debt. China has doubled holdings to 1,054 tons and is thought to be adding gradually on price dips, creating a market floor. Gold remains a tiny fraction of its $2.3 trillion in foreign reserves.

Jeff went on to say, gold is a great way to hedge against inflation and/or a fiat currency, but gold stocks may actually make you wealthy. Below is a chart of the entire market capitalization of the Gold Industry, as compared to some other companies and industries. Basically, this shows where Wall Mart has the same market capitalization as all the gold stocks added together. I guess you don’t have to be a rocket scientist to see that if there were a large move into gold stocks it would be like a stampede into Wall Mart.  

 

“The value, as measured by market capitalization, of all gold producers around the world is less than Wal-Mart’s. Every gold stock would need to nearly double just for the industry to match ExxonMobil. The oil and gas industry is about 12 times bigger.” Jeff Said.  

 

 

 

 

 

 

 

 

 

 

  

 

 

Now, having said all that, nothing goes straight up. One should always be careful about their entry, and their exposure to “the risk of reversal”.

Some potentially bearish factors include:

There is a huge net speculative short position on the U.S. dollar (the ‘carry trade’). For example, on the CME, we have 24,389 net speculative long CAD positions; 50,264 net speculative long contracts on the Australian dollar, and 28,036 net longs on the Euro. These are huge numbers. What happens if/when the U.S. dollar ever undergoes a countertrend rally?

The largest speculative long positions are in the commodity space (this is near-term bearish) … 271,564 gold contracts (a record) on the Commodity Exchange (COMEX); 44,312 net longs on silver (near-record but not quite), West Texas Intermediate oil contracts on the New York Mercantile Exchange (also a record); 10,871 net long copper contracts (a new cycle high); 5,538 net speculative long contracts on the Goldman Sachs Commodity Index.

Gold exchange-traded funds (ETFs) have accumulated an estimated 1,778 tones’ of gold, making them the fifth biggest holder after the US, Germany, France, and Italy. Since most ETF Investors are retail in nature there could be a rush out if the trade reverses. 

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Filed under: Food For Thought by Charles Maley