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The Potential Exists For an Epic Short Squeeze in Physical Gold

Freaking Heck's picture




 

By: Chris Tell at http://capitalistexploits.at/

I recall a long time ago when I was easily excited by the unqualified love of young inebriated women, hedonistic experiences, fast cars, guns and seemingly unusual setups in financial markets, which promised fortunes if traded correctly.

I now find that I just enjoy a day with my kids and later a decent glass of red. Ah, simpler times! I've also realised that "unusual" setups in financial markets typically turn into nothing more than a loss of my capital. Betting on outcomes which seem "so damned obvious" isn't as easy as one would think. Probabilities, as I discussed last week, are a key factor, as is risk/reward. 

This is of course as it should be. The markets are there to extract money from inexperienced, gullible "traders". OK, some are experienced and just careless, but many are newly minted dreamers, set out into the world by some seminar "guru" who convinced them they could day trade their life savings into a small fortune. You know what they say about small fortunes, right? Financial Darwinism!

Given this backdrop, I had a recent phone conversation with our friend Tres Knippa. For those that don't know him, Tres is a broker and trader on the floor of the Chicago Mercantile Exchange (CME). Clearly not a Johnny-come-lately. Tres shared with me some numbers.

By the way, paying attention to "numbers" and trading them intelligently is far superior to chasing unqualified love from long-legged women. Trading intelligently has been known to pay for supercars and penthouses, which will inevitably attract said long-legged women, so fear not!

The numbers Tres shared with me were:

  • -89,756.78 - This number represents the overnight movement of registered gold OUT of inventory at Brink's, and INTO Eligible Inventory at J.P. Morgan.
  • 370,137 - This is the number of ounces of Registered Gold for delivery.
  • 300,000 - This is the number of ounces, represented in gold contracts, that any one entity can own (3,000 contracts).
  • 81% - The percentage of supply at the Comex which would be exhausted should just ONE entity put on a "Limit Long" position, AND demand delivery.

These should be very scary numbers for the folks running the Comex, but even scarier numbers for anyone not holding physical gold and trading paper!

Tres also shared the chart below with me. This is a graphical representation of the amount of paper gold versus the Registered Gold available for delivery:

Comex Gold Leverage Ratio

Zerohedge recently posted an excerpt from a video Tres did here. Now, for those who are paying attention, the similarities between this little setup and an extended game of Jenga cannot be dismissed out of hand!

Zerohedge also posted a neat little story about the German's only having recovered a paltry 5 Tons of gold from the US, after a year! You can read all about it here. In short they have repatriated just 37 tons of the 674 tons they have promised to repatriate. At least the Comex may get forewarning of any demand for delivery from the NSA, who is likely still monitoring Sausage Lady's iPhone. Regardless, it's unclear to me what they would do about it should that demand for delivery actually come down the wire.

Over 2 years ago when we put together our Japan report I mentioned to Tres that I preferred to go long Gold, short Yen. At that time his preferred trade was centered around the JGB options market, and to be long the USD short the Yen. Looking back he was right and I was wrong. The USD has indeed performed better, and likely will continue to outperform in 2014. Although up to this point it's been more a factor of a breather in the gold bull market than USD strength.

I'm a gold bull, not a gold bug. I do believe that the long term trend for gold is bullish. This current setup clearly has the potential for some fireworks. Maybe nothing happens (doubtful), but the risk/reward setup is rather favourable from where I sit. Heads I win, tails I win.

Whatever you choose to do with the above information, I encourage readers to never ever confuse "trading for profit" with investing. I'm happy to trade futures contracts, buy gold in the FX spot markets - essentially trade paper in one form or another, but I would NEVER let that obfuscate the fact that I need to hold PHYSICAL GOLD as protection. Timing a profitable trade is like passing gas, it is largely a matter of knowing when it is inappropriate, and acting accordingly!

Grant Williams, the prolific editor of Things That Make You Go Hmmm... said it perfectly in his latest missive:

"Gold is a manipulated market. Period.
"2013 was the year that manipulation finally began to unravel.
"2014? Well now, THIS could be the year that true price discovery begins in the gold market. If that turns out to be the case, it will be driven by a scramble to perfect ownership of physical gold; and to do that you will be forced to pay a lot more than $1247/oz.
Count on it."

Think about this as a parting thought. Would the Comex, if under pressure for delivery, ever void your positions in order to "stabilise" the market? Or, would that just not be palatable in the Land of the Free? As Grant said above, "Count on it."

For the traders out there, Tres shared with me another anomaly in the gold markets which he's been trading successfully for the last couple of months. I'm in the process of translating this from "trader speak" into English, and it will be sent out to members of our currently complimentary Trade Alert service shortly. You can get access to this and more by dropping your email here.

- Chris

"I firmly believe that in the years to come, when we look back at the great game being played in gold, we will pinpoint January 16, 2013, as the day when it all began to unravel.
"That day, the day the Bundesbank blinked and demanded its bullion, will be shown to be the beginning of the end of the gold price suppression scheme by the world's central banks; and then gold will go on to trade much, much higher." - Grant Williams
 

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Wed, 01/22/2014 - 15:45 | 4356272 Took Red Pill
Took Red Pill's picture

then there's idiots like this guy, Mark Hulbert, who says If the 10-year Treasury yield rises to 5%, gold will fall to $471 an ounce.

http://www.marketwatch.com/story/the-incredible-gold-interest-rate-corre...

Wed, 01/22/2014 - 15:15 | 4356150 ebear
ebear's picture

"Trading intelligently has been known to pay for supercars and penthouses, which will inevitably attract said long-legged women, so fear not!"

Most would-be traders burn out in the first year which is probably a good thing since there aren't enough long-legged women out there to meet demand.



Wed, 01/22/2014 - 15:42 | 4356265 THECOMINGDEPRESSION
THECOMINGDEPRESSION's picture

The good thing about BITCOINS is I can collect them for free without paying, trading one red cent! If you have a bitcoin wallet, join for free and spin: http://freebitco.in/?r=224682

Wed, 01/22/2014 - 13:31 | 4355792 Sufiy
Sufiy's picture

With the highest on record leverage at COMEX of 112 owners for every single ounce of Gold and record low COMEX registered Gold at 11 t we have the set up for the major blow out phase in the Gold market. Who in their mind will continue to hold Gold at LBMA any more? According to Eric Sprott, we can expect a failure to deliver Gold and lawsuits with deliveries last February from COMEX of 40 t and China buying at least 100 t of Gold every month on average now.
  Once Gold will breach $1270 level Andrew Maguire's discussion about the massive short squeeze will become the reality and even if his predictions about $200 Up-days will not materialise, the move by Gold to the upside from the most oversold condition in history will be nothing less than spectacular.

 

http://sufiy.blogspot.co.uk/2014/01/there-is-no-german-gold-left-at-new....

Wed, 01/22/2014 - 21:55 | 4357537 Squid-puppets a...
Squid-puppets a-go-go's picture

indeed. anyone else notice the gold slam-downs being conducted in a more circumspect manner in the last few weeks? They know now they are being watched on this and that lawsuits await them

Wed, 01/22/2014 - 13:36 | 4355791 Fíréan
Fíréan's picture

Who's long gold and who is short ? and which entities holds the majority of either shorts or long contracts ?

Which bank took largest delivery ( from Comex) of gold the over last eight months ?

Why is there no discussion or reference there of ?

edited to add at least one relevant link :

http://seekingalpha.com/article/1910671-weekly-comex-gold-inventories-go...

 

 

Wed, 01/22/2014 - 10:00 | 4355041 devo
devo's picture

This theory...again.

Comex doesn't have any of the commodities; it's not just gold. If you believe this theory get out there and take delivery of physical corn and lean hogs, too.

Wed, 01/22/2014 - 15:13 | 4356142 Chief KnocAHoma
Chief KnocAHoma's picture

Hogs have three litters per year... maybe over thirty piglets every year.

Corn is replentished every year.

Gold .... what ever amount exisit remains constant.

Wed, 01/22/2014 - 09:58 | 4355029 Kina
Kina's picture

European baby boomers and any surviving parents will certainly feel the connecion to gold and silver as a means of protection in uncertain times.......and if you live in Europe and don't have gold....you are totally crazy.

The lower they push gold the faster it will be sucked up...they make it more affordable.

Europe saw Cyprus and what they did to steal from the people...they see Greece, Spain, Ireland....etc.... they know things are shit and that banks and governments are the last lot to trust in anything.

So the head of the LBMA was out there trying to get mining companies to sell their gold production down by $400 and oz....and now we today we have the usual on-line MSM shill site...runnning the story that gold could go down to $800... coincidence.

Nope the shill site is doing as it is told...negative stories on gold to help those who have got themselves into the shit over gold.

LBMA dude is a fucking idiot telling mining companies to bankrupt themselves...but they will be bought out be the Chinese who will happily mine it direct to themselves..... reducing free gold on the market.

 

 

 

Wed, 01/22/2014 - 08:36 | 4354899 hugovanderbubble
hugovanderbubble's picture

Counterparty Risk On Period. GLD

Wed, 01/22/2014 - 08:01 | 4354870 jmcadg
jmcadg's picture

Call the bottom whenever it feels right. I prefer to hold the physical in my hand and add if the opportunity arises. The future price will be much higher at some point.

Wed, 01/22/2014 - 09:37 | 4354973 d edwards
d edwards's picture

Paper gold is just another fiat. Gimme physical.

Wed, 01/22/2014 - 03:44 | 4354715 nlevis
nlevis's picture

Very interesting discussion folks. I am particularly impressed by the depth and breadth of each of you prognosticators. I confess that I am not well schooled on matters of futures, commodities, bonds, stocks, derivatives and such. Long positions, short positions, squeezes? It is indeed all Greek to this simple man. What do I know of gold? Well, not much. Except that it is a shiny rock that the Aztecs used to adorn their persons and lairs and that the native tribes of America dismissed as a nuisance that attracted the ignorant and arrogant white man.

So I have little, if anything, of value to add to this heady discussion. Except perhaps this.....I own a small ranch in the mountains of the last free state in the union. I grow my own food, raise my own beef, hunt and trap game for fur and meat, fish in crystal clear mountain streams, and built my own home from my own timber. I own a couple of trucks and a tractor or two, but I could live without them, if I had to. I can build, do electrical and plumbing, weld, repair an engine and fix just about any mechanical issue that comes my way. I'm teaching myself how to make alcohol right now, for medicinal use, of course. I'm on the grid and my electricity is cheap, but I am planning to go full solar soon. I'm intrigued by bio fuel, woodification, geo thermal heating, hydrogen generators and numerous other alternative energy sources. I own many types of firearms and a large supply of matching ammunition. I am a peaceful man, unless provoked. I have lived in the city, but for the last 15 years of my 60 years of life I have lived in the country. I have no debt, except to God. And I am hoping that he continues to extend my credit. So I wish you all the best of luck with your shiny rocks. But if the SHTF, and you should happen to need my help, you can keep your rock collection, because I, and the thousands of silent other's like me, still won't have any use for it!                

 

Wed, 01/22/2014 - 22:01 | 4357560 Squid-puppets a...
Squid-puppets a-go-go's picture

Prepping - ur doin it rite

totally.

goldbugs forget that gold is the 2nd tier of economic foundation - the first being the barter economy. I own gold because a) i'm useless as a survivalist and b) im betting/hoping that the collapse is not so total as to reduce everything everywhere to the first tier barter economy

 

I'll happily admit that. nlevis, u da man

Wed, 01/22/2014 - 20:40 | 4357282 MeelionDollerBogus
MeelionDollerBogus's picture

Even to deliver ammunition? How about medicine?
You make your own fuel for those vehicles?

Wed, 01/22/2014 - 11:49 | 4355392 Vooter
Vooter's picture

Wait, you're the Dos Equis guy, right?

Wed, 01/22/2014 - 10:43 | 4355166 messymerry
messymerry's picture

Don't be quite so smug my friend.  Conventional wisdom is that there are two places you don't want to be in a collapse scenario.  One is in a city and the other is out by yourself.  The best position I know of is a couple dozen houses in the middle of a long unpaved road with "dead end" signs at both ends.  Everything else, you have exactly right.  OBTW:  Please be slightly more gentle on those not as fortunate as you.  Gold will remain money as long as there are two people to trade goods and services.  If you're stuck in the city when the Shiite hits the fan, then a bit of gold and silver may just be your ticket out.  Me, I'm still looking for a house in the middle of a long road with dead end signs at both ends...  ;-)

Wed, 01/22/2014 - 05:08 | 4354776 FinalEvent
FinalEvent's picture

Dude, I'm so jealous. Not joking.
Stay "dumb" about shorts, longs, futures and derivatives, there is nothing to win for you.

Wed, 01/22/2014 - 02:50 | 4354656 ACasey
ACasey's picture

I saw a televised public execution, the last by guilliotine in France in 1946 if I'm correct.  Impressive.  The crowd was massive and went wild.  I do not know what it was for but it was impressive.

Let's have a Special Olympics.  Rather than countries tearing each other to pieces and millions dieing in the coming wars, there is a better idea at hand.  Round up all these global bankers responsible for the fraud, crimes, theft, wars, and misery and execute them publically and televised by guilliotine.  It will will be impressive the number of lives saved.

It will send an impressive message to anyone ever, ever, ever thinking of pulling off the crimes these global bankers engineered from ever thinking about it again. 

Wed, 01/22/2014 - 03:28 | 4354700 IrritableBowels
IrritableBowels's picture

I would advise changing the name to something (anything) other than "Special Olympics"...

Wed, 01/22/2014 - 20:39 | 4357279 MeelionDollerBogus
MeelionDollerBogus's picture

100 meter slash?
Executive Olympics?
Guillotine Triathlon?
Hungry,Hungry Hippos? (olympic pool with very angry, hungry hippos, add banksters = fun)

Wed, 01/22/2014 - 09:08 | 4354924 debtor of last ...
debtor of last resort's picture

Qualitative easing.

Wed, 01/22/2014 - 01:27 | 4354552 Arrowflinger
Arrowflinger's picture

Gold bugs have cried "Wolf" too many times. I will believe it when I see it.

I no longer waste my time with these articles.

Wed, 01/22/2014 - 15:24 | 4356199 superflex
superflex's picture

So that's why you felt compelled to pontificate.

Got it!

Tue, 01/21/2014 - 22:56 | 4354252 bill1102inf
bill1102inf's picture

There is no such thing as a short squeze in anything physical. Have you heard of a short squeeze in physical hogs/sugar/gasoline? No? Didn't thing so.  If we get a bump itll be more like a bull trap before collapse.

Wed, 01/22/2014 - 02:58 | 4354670 ACasey
ACasey's picture

The point is the short squeeze is fraudulent positions based on physical that does not exist known as naked-shorts.  Naked shorts are fraudulent and illegal but the US Federal Reserve is using fraud executing illegal trades to depress the price of gold to stave off the price to buy physical gold they need to pay their worthless debt to places like China. 

As for collapse, currency founded on nothing but debt will collapse because it is not based on anything physical.  Gold, in short supply and tremendous demand, will bounce to levels never seen as the market equalizes once free of fraudulent naked-short selling by a corrupt bankrupt banking institution;  the US Federal Reserve.

Wed, 01/22/2014 - 13:30 | 4355789 fortune114
fortune114's picture

There are no "naked shorts" in futures (the term refers to shorting a stock without borrowing it first, which is illegal).  It is not illegal to have futures contracts open on physical which does not exist.  That is more of the exchange's and participants' problem if someone opts for delivery.  But there are other issues (e.g. margin requirements) that would cause most contracts to be liquidated if the price starts running either direction.

Wed, 01/22/2014 - 10:00 | 4355040 Quaderratic Probing
Quaderratic Probing's picture

Money is created when you take loan and destroyed when you pay that loan off, the physical that remains is the thing you bought.

Wed, 01/22/2014 - 10:16 | 4355103 Muppetrage
Muppetrage's picture

It's the interest that is not destroyed.

Wed, 01/22/2014 - 20:05 | 4357156 Quaderratic Probing
Quaderratic Probing's picture

Like the interest we get other nations pay by buying our bond market.

Tue, 01/21/2014 - 22:45 | 4354224 xavi1951
xavi1951's picture

Yawn!

Tue, 01/21/2014 - 22:04 | 4354101 tony bonn
tony bonn's picture

comex is dead. deliveries are low because it has failed to deliver. the gold is in severe and permanent backwardation - and if you are looking for the price of paper gold you are probably a fucktard.....premiums on tonnage according to willie are about 200 usd.

Tue, 01/21/2014 - 20:36 | 4353788 Debeachesand Je...
Debeachesand Jerseyshores's picture

Gold and Silver are trading in a very limited range.This holding pattern can't last to much longer,so be careful in any trades you make period.

Tue, 01/21/2014 - 20:03 | 4353684 Castiel123
Tue, 01/21/2014 - 19:53 | 4353648 Castiel123
Castiel123's picture

 

 

 

Suggested reading:

http://www.salientpartners.com/epsilontheory/notes/American_Bandstand.html

 

Excerpt:

Gold rocked last Friday, on deflationary news. Huh? I know that gold bugs will tell you how great gold can be in a deflationary environment, but come on, that only makes sense if you’re talking about end-of-the-world deflation. The jobs report last Friday was run-of-the-mill, plain vanilla disappointing growth news. Not end-of-the-world news, not even negative growth news … just disappointing growth news. This should be bad for gold prices, not good, and Friday’s price action made no sense through the lens of traditional economic theory. But it made perfect sense through the lenses of history and game theory, where the meaning of gold has shifted from an alternative store of value to insurance against Central Bank policy error.

 

 

Tue, 01/21/2014 - 23:23 | 4354305 Rearranging Dec...
Rearranging Deckchairs's picture

the meaning of gold has shifted from an alternative store of value to insurance against Central Bank policy error.

Read the blog posts and  I agree that Gold no longer moves according to expectations of Inflation or Deflation but rather is some function of the market psychology (essentially how the participants feel about the omnipotence of central banks machinations). 

Just not sure how that helps me know when to back up the truck and time the gold market as I have neither any control nor influence over the psychology of the market particpants and their current thoughts re central bank omnipotence just as i had no control over inflationary or deflationary expectations. 

Central Banks surely are naked emperors but the rest of the emperor's court still seems to be pretending he is clothed in superb silk robes. 

Wed, 01/22/2014 - 22:42 | 4357680 Squid-puppets a...
Squid-puppets a-go-go's picture

you dont need control or influence. Who does in a trading environment?

all you need to ask is 'are the central banks on a sustainable path'? and 'what has been the effect on gold in every past time in history when the money supply has been dramatically increased

and the answer is; buy as soon as you feasibly can, and wait.

we're not playing some daytrading game here, or short - mid-term speculative arbitrage, we're talking about global indebtedness that is eviscerating capital and GDP sapping interest payments eroding productive output even despite ZIRP

you really wanna play?

i aint playing. I'm just doing my best to save what ive accumulated

Wed, 01/22/2014 - 09:44 | 4354990 quasimodo
quasimodo's picture

Just put the bitch in reverse and back it up. Don't worry so much about the price/ounce. If you are trying to time this and selling later then you are, for the most part, crazy. 

Just close your eyes, plug your nose and buy with both fists. Feels much better once you trade some pretty green chunks of paper for something that actually has some mass to it.

Tue, 01/21/2014 - 21:23 | 4353952 wisehiney
wisehiney's picture

Thanks, good stuff.

Tue, 01/21/2014 - 19:47 | 4353623 FreeMktFisherMN
FreeMktFisherMN's picture

I don't hold gold as a get rich scheme. Sure, it has been so suppressed that when it emerges out of the water it will revalue way higher, but it is foremost a means to preserve wealth. It has always been accepted as money. Historical ratios like gold/oil, gold/grains, generally are consistent and that shows why gold preserves value over time. 

Wed, 01/22/2014 - 12:25 | 4355549 dizzzave
dizzzave's picture

Every gold bug I've ever met expects that the collapse of fiat currency and the world is close at hand. From the ashes they will emerge with their gold as the new kings. If that isn't a get-rich-scheme, I dunno what is.

Wed, 01/22/2014 - 20:38 | 4357274 MeelionDollerBogus
MeelionDollerBogus's picture

Then you don't know what is - nothing quick about it - but once a generation it happens. It's time.

Wed, 01/22/2014 - 15:22 | 4356183 stacking12321
stacking12321's picture

so, you 've met some some foolish people, hurray for you!

Tue, 01/21/2014 - 19:14 | 4353510 kaiserhoff
kaiserhoff's picture

Nice piece.  Good to see some solid numbers instead of speculation.

Who would have the balls?  A miner maybe?  That could be fun.

In grains, position limits do not apply to hedgers, ie the big exporters.  Anyone know if there is a similar exemption in gold?

Tue, 01/21/2014 - 19:11 | 4353492 richsob
richsob's picture

I've heard answers both ways on the following question.  Please give me your opinions.  Assume silver/gold are in short supply for the COMEX; how does that affect ETF's like SLV which own physical silver?  Would an owner of something like SLV expect to see (paper) profits in that scenario?

Tue, 01/21/2014 - 19:16 | 4353517 carlnpa
carlnpa's picture

We are likely to see all trading halted as a result of an unprecidented national security issue.

The SEC doesn't give a shit about any of the metals markets.

Tue, 01/21/2014 - 19:23 | 4353538 richsob
richsob's picture

So an entity (SLV) who owned 300 Million to 400 Million ounces of silver would  just sit there dead in the water?  That doesn't make sense.  The silver would be worth a fortune.

Tue, 01/21/2014 - 20:03 | 4353681 carlnpa
carlnpa's picture

The existance of metals backing SLV and GLD has been widely debated.

 

If its not there does the market keep trading or does the SEC shut it down?

 

I like the metals but would never bet on a short squeeze.

 

This is a matter of national security, the feds will exercise that card.

 

Metals markets will be halted indefintely.

 

Comex will not be allowed to collapse, think MF Global as an example.

 

 

Wed, 01/22/2014 - 20:47 | 4357312 MeelionDollerBogus
MeelionDollerBogus's picture

MF global did collapse. Do you mean to stop delivery? What if LOTS of places needed delivery, gonna MF-Global every broker on Earth?

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