Coordinated smash-down in gold and silver? Hedge Funds Increase Wagers after Worst Slump in 30 Years…

by Joe Oliver, Forex Trading-Pips

Hedge funds have increased their bets on gold rallying following the worst slump in the yellow metal for over 30 years. Fund managers and other speculators increased net-long positions in gold by 9.8 percent to 61,579 futures & options in the week ended April 16.

The ‘coordinated smash-down’  in gold and silver was the topic of conversation last week, but is it true? Monetary Metals explore this question in their latest Gold Basis report…

The cobasis in the June contract fell below zero; it went out of backwardation. This means that a big part of the price drop was driven by owners of gold metal selling (perhaps to cut their “losses” measured in dollars). After the big plunge, the cobasis began rising along with the price, showing that the price was rising due to buying of physical metal more than futures (more on the futures below).

Gold Basis

 

In the gold chart, we’ve marked the place where, rumor has it, 500 tons (assuming this is Imperial tons, it would be 16.3M troy ounces or 163K gold futures). According to the rumor, the price of “paper” gold was smashed down but physical gold has strong demand. It’s hard to interpret magical thinking, but if we were to take a stab at it, it should mean that physical gold is still trading for $1600 and only “paper” gold is now $1400.

There is a technical term for this, that some readers may have seen somewhere along the way: backwardation. If the June contract were at $1400 and physical gold were $1600, that would be a $200 profit to decarry (i.e. sell physical and buy a future) which would be 12.5% in about two months, or about 75% annualized.

Back in reality, the cobasis did not rise; it fell. Below zero. Now it has risen above zero again (though the magnitude is still a fraction of 1%, annualized).

Here is the basis chart for silver. We have included both May and July futures, as traders are rapidly closing May and moving to July.

Silver Basis

 

We marked the points at which the alleged massive “naked” short supposedly knocked the price down. As with gold, the cobasis fell.

Unlike in June gold, in May silver we now have the dynamic of the contract roll. Those who have naked positions must close those positions. Longs must sell. Shorts must buy. If there were a significant short position, this would drive up the ask in the contract.

Cobasis = Spot(bid) – Future(ask)

A rising ask on the future would cause the cobasis to fall during the roll process. Yet we see a rising trend in the red line until the crash and it has begun rising again. Everyone has to make up his mind whether he wants to believe in the tooth fairy, Santa Claus, and the Vampire Squid who shorts gold and silver “naked”. All we can do is provide the evidence.

…More at Gold Basis Report RE: Silver “Smashdown”

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