As Gold Rebounds Over $1600, Some Thoughts On Why The Liquidation Snapback Is Here

Tyler Durden's picture

Yesterday when gold was trading in the $1570 we suggested that based on the very volatile shifts in the funding environment for gold, whereby the gold lease rate had moved from record negative to borderline flat, the plunge in the yellow metal is likely coming to an end. Less than 24 hours later, gold has just passed $1600 yet again. And as the following note from Sandeep Jaitly of First International Group (whose interview with Max Keiser exposing economics for fraud back in June was quite the hit) observes, by analyzing the continued funding unwind pressure, the recent liquidation move in gold is one that has to be taken advantage of. To wit: "The movements in the bases confirm that the recent downward move in gold against Dollars was as a result of Dollar funding pressures. Gold was lent on the swap against United States Dollars. This swap must be unwound and where a bid for gold was sought to raise Dollar liquidity, an offer of gold will be sought to unwind the swaps. The co-bases for Feb-12 and Apr-12 gold contracts are starting to advance – an exceptionally bullish signal following the selloff and a sign that physical buying is being prompted by these lower prices. It would be very prudent to accumulate gold against United States Dollars aggressively over the next fortnight."

From First International Group, Gold Basis Service

LONDON, Thursday 15th December, 13:43 HRS BST. Spot gold is currently $1,584.25/45, and the gold/silver ratio is currently 54.56/54.63. The conclusion from the last missive sent on 23rd November read:

“The movements in the December gold bases are still pointing to further upside for the gold price in fiat currencies – especially the Dollar, Euro and Pound Sterling (note the drop of just referring to the United States Dollar.) The ratio of the December gold/silver bases is pointing to downside for the gold/silver ratio.”

Gold was $1,687.15 bid at the time. Subsequent to that, it rallied to a high of $1,763.01 on 2nd December, before falling back to its current $1,584. The movements of the basis and co-basis during this time told all.

The chart to the left displays the normalised co-bases for The Dec-11, Feb-12 and Apr-12 COMEX gold contracts (left hand scale), as well as the gold price on the right hand scale.

Point 1 on the chart shows the December contract going into backwardation (a high of +0.7% was reached on 30th November), just as the price of gold began to escalate. Point 2 shows the backwardation in the December contract starting to decrease and fall rapidly – a few days ahead of the contraction in the price from 2nd December’s high. Point 3 shows the co-bases for Feb-12 and Apr-12 advancing higher towards a possible backwardation (likely to occur by the beginning of January by historical standards.)

A lot of reasons have been given for the correction in the gold price – futures liquidation being a prime candidate. However, this is not the case as movements in the bases tell otherwise. There has been continued Dollar-based funding pressure in the money markets of late (witness the escalation in LIBOR which has doubled over the past few months.) The escalation in the gold lease rates – that prompted gold to go into backwardation – was caused by gold being borrowed with the intention of providing Dollar liquidity (by selling the gold in a ‘sale and repurchase’ transaction.) The fall in the gold price being accompanied by a fall in the co-basis points to signs of physical gold being liquidated not futures. Massive futures’ liquidation would see the co-basis rise and basis fall – the complete opposite of what actually occurred.

The salient points to remember here are: that the borrowing of gold caused lease rates to escalate above money market rates and that gold was borrowed ‘on the swap.’ The former point can only be explained by the fact that the physical gold market is very tight (in terms of both supply, and loanable gold.) With the latter point, one must remember that swapped (and sold) gold must be returned (and therefore bought.)

The Feb-12 and Apr-12 COMEX gold contracts are already advancing towards backwardation with the co-bases for each having bottomed on 9th December (Point 3 on the chart above.) This is an exceptionally bullish sign for gold priced against fiat currencies. As the gold price has been correcting, physical interest is dominating the gold market.

The amount of gold stored at COMEX warehouses remained static over the past quarter as can be seen in the chart to the left. However, there was an important mix shift at the end of November into December: around 1m ounces of gold (around 10% of total inventory) was shifted from the ‘eligible’ category to the ‘registered’ category. That is ‘registration’ for sale. This again points to gold on the swap being the cause of the price decline.

The gold/silver ratio has remained range bound, currently at 54.56 bid v. 53.16 bid at the last missive. There is insufficient data for 2012 contracts to provide a change in this stance.

The fourth quarter’s Course of The Exchange will be published soon. As patrons of this service have known since the beginning of the year, the Dollar’s resurgence against other fiat currencies was expected. We will be reiterating the (unchanged) reasons for the continuance of this trend going forward. Issues surrounding the Eurozone will be covered from a multi-century historical perspective. United States equities, bonds or both for 2012? This will be a central issue to be discussed as well.

CONCLUSION…The movements in the bases confirm that the recent downward move in gold against Dollars was as a result of Dollar funding pressures. Gold was lent on the swap against United States Dollars. This swap must be unwound and where a bid for gold was sought to raise Dollar liquidity, an offer of gold will be sought to unwind the swaps. The co-bases for Feb-12 and Apr-12 gold contracts are starting to advance – an exceptionally bullish signal following the selloff and a sign that physical buying is being prompted by these lower prices. It would be very prudent to accumulate gold against United States Dollars aggressively over the next fortnight.

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Saxxon's picture

I was long DGP a day early for a flip but I was and am never concerned.  To my surprise, not a single negative emotion has passed through my mind re this position - I cannot not even generate one via contemplation.  That is how confident I am of these trades.

Unless you need the money or margin forces you out, you need not take a loss on a long gold position.  History and very large social forces are on our side.

clones2's picture

Uhhhhhhhh - it was down 10% in 4 sessions.  And was oversold (RSI under 30).

How's that for explaining the 1.2% surge in pre-market....?

SRSrocco's picture

Pladizow... Roubini is an idiot.  When Nouriel Roubini and Nassim Taleb dicussed the events taking down the markets in 2009 on CNBC, Roubini sounds like that typical monotone professor we had in college that bores the living hell out of you.  Taleb on the other hand is passionate and speaks the real truth which makes Roubini look like the fool he is.

Furthermore, it isn't just the gold lease rates going negative that created a bottom in gold.  Tom Szabo from the metal Augmentor has been writing about the gold basis, and lease rates for years.  You might want to check out his recent article:

Negative Lease Rates and the Ticking Time Bomb

Pladizow's picture

The question was sarcastically rhetorical!

SRSrocco's picture

Plad... I knew that.  Roubini is typical of those who are the BLIND LEADING THE BLIND.

Montecarlo's picture

I hope people remember that plenty of "thought leaders" or those who pose as experts get paid for their "research."  Something as ignorant as Roubini's comments in this area look paid for.  Occam's Razor.

Elmer Fudd's picture

Would they be Nouribugs or Roubibugs, and "where are they now?"

Scottj88's picture

"Thoughts on why the gold market is rebounding?"

Is this a serious post? ;)

Oh regional Indian's picture

Over the next fortnight? Just as the Dollar index accelerates into a pre-death reach for the sun? Hmmmm.....



akak's picture

Yes, I will admit to not running to Google for the answer, but what in the Hell is a "fortnight" anyway?  Is that like spending a night in a fort?

I wish ZH would edit out all dialectical and local slang from their reposted articles --- it makes the site appear sloppy and unprofessional.  Like all those foreign misspellings of the words "while" and "learned" with "t"s in them.

pointer's picture
1 fortnight = 14 days
WonderDawg's picture

LMFAO The uber-intellectual and worldly akak doesn't know what "fortnight" means. That's precious.

akak's picture

Thank you for trolling.

Haddock's picture

You could look up 'ignoramus' too...

Paper CRUSHer's picture

Oh, here's a little more for y'all ya folks out there that are into heavy metal:

spiral_eyes's picture

All of this is statistical noise. If Bernanke is looking for something "transitory" it is this gold slump.

Bitchez need to look at the long term gold trends to understand the real reality.

My Taint's picture

Every other article is about gold. I would call that group think...Makes me want to see it go under a grand.

tmosley's picture

You are an idiot.  The last one was about rising production.

Also, ZH isn't the street.  All the trolls make that exact same mistake.

Popo's picture

True.  But one must responsibly point out that ZH does tend to have blinders on when it comes to gold.

After all:  All commodities are green today.

Oats, Lumber, Copper and Sugar are significantly outperforming gold.  Which would seem to call into question Tyler's theory on why "Gold" is rebounding.

'Just sayin' 

tmosley's picture

That is Tyler, not Zerohedge.  Zerohedge includes all the Tylers and the commentors.

As you yourslef point out a difference of opinion you have with Tyler, so do many people have their own theories.  There may be a prevailing wisdom, but there is no shortage of differing opinions.  The point is that the prevailing wisdom on ZH almost never overlaps with the prevailing wisdom on the street.

defn8Dog's picture

There is ususally a time differential, with ZH being somewhat early to way early.

Spitzer's picture

what about august ?

and gold is up on the year. most stuff isnt

Haddock's picture

You are quick to call people idiots, but unfortunatley the thin content of your posts does not justify your haughty arrogance.

WonderDawg's picture

Tmo gets very emotional about his PMs. He's good entertainment, though, when him and Trav get going. Fun to watch, but keep a towel handy for when the spit starts flying.

Haddock's picture

He is emotional for sure, but has a one dimensional view and refuses point blank to enter any dialogue which questions this view.

His habit of labelling anyone with a view contrary to his as a troll or sheeple or idiot bugs the shit out of me, and the hordes on here that follow this line is turning the ZH comments section into a gold/silver pumping ground, nothing more.

JOYFUL's picture

U B Tru Capt...but as an old salt, u will surely realize that the taint was jus baitin the Mosley luvs anything shiny!

in a desert every second sentence may involve the word Water

so in a world devoid of fiscal reality why shouldn't every second article involve the word Gold?

WonderDawg's picture

I'm with you. Back in the spring when silver was bolting towards $50, I suggested that there would be a big correction, and Tmo and akak absolutely trashed me, called me every name in the book, including "statist". Hilarious, considering my views about the MIF complex. But, because I suggested PMs weren't going to the moon, I was junked into oblivion. Whatever.

I feel bad for one guy on here, don't remember who it was. Silver was at $45 and still rising, and he said he was selling everything that wasn't nailed down, and would max out his credit, to go all in on silver, as the pumpers were telling him how smart he was to do so. Bummer for him for listening and buying into the emotional pumpfest that was going on.

And just for the record, I'm not anti-PM, I just want to maximize my purchases.

Libertarian777's picture


As in any context one has to look at your entire portfolio as a whole.

Yes there are strong bullish arguments for unprintable gold and silver, but holding something that is this volatile would not help a retired person who needs a steady income stream TODAY.

Sure if he bought 100% gold/silver back in 2003 he'd be fine now, but he'd have been just as fine if he bought and in 1995/6 and sold out in 1999.

Hindsight is always perfect.

I believe in the shiny stuff, I just believe more in risk management. For better or worse, we are stuck in the current financial system and HAVE to use USDs to buy and sell stuff. Whether I believe a FRN is counterfeit or not, or whether or not I would accept gold and silver in payment, doesn't help if 99.99% of the rest of the population wouldn't pay $50 for a gold eagle.

So while it might be nice if you could negotiate with your bank to pay your mortgage in gold / silver, they won't accept it, so it leaves you having to sell a gold coin every month to cover your mortgage and then you have high transaction expenses, bid/ask spread from the dealer and the potential of coming up short due to volatility in any particular month

trav7777's picture

akock and mosely-claven are like that.

They get adulation and virtual popularity from shamelessly pumping.  So what if they create massive bagholders and wipe out life's savings along the way?  It's not about truth for them, it's about drawing sychophants and getting favorable attention.  In reality, they are no different from people like politicians or those who lead cults.  Any dissenters must be punished.  It's the height of irony that ZH has an orthodoxy and if you cross it, these same "freethinkers" call to have you sent to a virtual gulag.

Someone who CARED would have advised extreme caution at $49, as I did.  In fact, I called out specific technical indicators flashing HUGE warning signs.  I'm not here to win your friendship; I am here to tell you the truth, whether you LIKE that truth or not. 

I have noticed that a LOT of the so-called ZH glitterati are really in this more to have an audience of drooling supplicants...they're would-be cults of personality.

WonderDawg's picture

Yep, and I view those guys as entertainment. Unfortunately, others take them seriously. That's what I love about this place; I find the truth, which can be disturbing, but those guys are around for comic relief. You sure know how to push their buttons LOL.

akak's picture

If memory serves, you made quite a number of posts at the time slamming the ownership of PMs in general, NOT just silver at that particular point in time, as well as spreading gross misinformation (or disinformation) over monetary matters, and especially over monetary history, distorting it with a pro-fiat statist bent.  That was why I attacked you back then.

WonderDawg's picture

Wrong on all counts, akak. My posts suggested that PMs would rise and fall, not just rise, and when they blew out, I suggested there would be a correction. For this, you slammed me, called me names. I could just picture you frothing at the mouth, eyes bulging, veins popping. I thought it was kind of funny how badly you misread me. I've done a lot of analysis, and I believe we'll see deflation before hyperinflation, and for this you also slammed me. But it's happening right before our eyes, and you don't see it. Whatever. Although you and I agree on most things, you get so fucking bent out of shape if someone doesn't agree with your projections on PMs and hyperinflation, you go straight off the fucking deep end.

Whatever. You're funny like a clown. You are here for my amusement.

akak's picture

You just proved yourself a low-class act, Wonderdawg, by attributing to me words and thoughts that I NEVER expressed nor held.

Please show me ONE POST in which I even implied that PMs were heading "to the moon", or will rise in a straight line.  Let me save you time --- you can't. 

But I know for a fact that you grossly misrepresented monetary history time after time, taking the deceptive and dishonest deflationary line, never acknowledging, and even denying, that EVERY government issuing a fiat currency and taking on exponentially-rising debt has sooner or later ended up radically depreciating their currency, wiping out the savings of their citizens in the process.  Anyone suggesting that we have more to fear from deflation (or anything to fear from it at all) rather than so-called "inflation" (which should be called what it really is, currency debasement) is either living in a fantasy world devoid of any historical perspective, or is just another malicious shill of the financial and political elite, furthering their agenda by scaring the sheep with dire threats only to make them run directly into the slaughtering house.

WonderDawg's picture

LMAO There you go again. So predictable, but that's part of your charm. Tweek.

akak's picture

Thank you for trolling.

tmosley's picture

More complete post below.

akak's picture

Trav, in addition to being a vile, hate-filled racist, you are an utterly shameless liar.

I have NEVER "pumped" silver, nor gold, nor ANYTHING here, ever --- and I challenge you to find one single post in which I did.  I have also NEVER advocated nor even discussed the short-term trading of PMs, unlike you, always taking a long-term view instead, as I firmly believe that the day will come when all short-term and paper PM traders are going to be burned, just as MFG clients were recently burned.  Any comments that I have made about the wisdom of owning precious metals in a time of profligate, debt-ridden governments and the manifest dangers in relying on their fiat paper Ponzi schemes have been completely general and non-specific in nature, and would have been just as applicable five or ten years ago as today.

In short, YOU LIE!

tmosley's picture

If Trav were Jim Carry from Liar Liar, all of his comments would look like this:

Trav does nothing but lie and ignore the truth.  He to this day claims that I said that everyone in Tokyo would be dead or evacuated within a couple of weeks of a post back in late March.  I did say that, but he allows the reader to assume that I was talking about radiation, when I was in fact talking about the fact that the water supply had been cut off, and that all the stores were out of bottled water.

Further, he is purposefully dense when it comes to my calls.  He pretends as though I didn't start saying "buy" until silver was $49.  When I tell him my cost average only recently passed $18, he claims that I was pumping silver without buying it myself, showing that he doesn't know what an "average" is.  Why would ANYONE listen to this goon?

The answer?  They would listen to him because he confirms their bias against PMs.

Zero Govt's picture

WonderDawg   "But, because I suggested PMs weren't going to the moon, I was junked into oblivion."

You're being the party pooper, what did you expect?

Try suggesting a 1% spending cut next time the Super Committee meets and see what reaction you get   ...'duck!'

Anyway it's nice to get junked into oblivion every so often, keeps your feet on the ground  ;)

WonderDawg's picture

That's right, ZG. Gotta stay grounded ;-)

fuu's picture

"I feel bad for one guy on here, don't remember who it was. Silver was at $45 and still rising, and he said he was selling everything that wasn't nailed down, and would max out his credit, to go all in on silver, as the pumpers were telling him how smart he was to do so. Bummer for him for listening and buying into the emotional pumpfest that was going on."


What kind of moron does that? Seriously he was a chasing a get rich quick scheme and you feel sorry for him?

bernorange's picture

Not sure how one can view the actions of central banks, FX markets and globalist groups like the IMF, World Bank, etc. and not have an interest in what's happening with the gold markets.  Have you read Rickards' Currency Wars book?  I think there are larger issues playing out people should be paying attention to.

That's not to say that constant pumping isn't annoying, just that keeping a focus on what's happening with gold is deserving of regular commentary here.  My $.02 anyway.

tmosley's picture

Uh-huh, I guess you haven't been paying attention to the habits of certain posters, who in fact, continuously register new user names for not other reason than to bash PMs.  The same two or three idiots have been doing so for at least a coupe of years now.  It is easy to point them out by their writing styles.

For example, Max Fisher is Texas Gunslinger is RedNeckRepugnicant among others I have forgotten.  "My Taint" is likely the lower class troll who has had dozens of names, starting with "MeTarzanUJane", and ending with one who actually stalked me through the internet and tried to have me fired from my job.

There are plenty of people with contrary opinons that we have good discussions with.  Topcallingtroll is a good example.  But the fact is that there are very few people who are able to argue against a PM bull market, or even against a "to da moon" argument simply because damn near all the facts are on their side.

The only time I become "emotional" is when assholes like Trav and the name-changing troll brigade try to hurt people with lies, half truths, mischaracterizations, etc.  This is OFTEN.

Elmer Fudd's picture


You dont think much, do you?  Didn't do well in math or science either, huh, too hard on that old brain, right?

achmachat's picture

I was able to BTFD.
I am a happy camper.
how about you?

SWRichmond's picture

Caught hoping for more dip....dammit.

tekhneek's picture

Yeah I'm with WD. I'm one of those "i bought a long time ago and have kept buying" types but the way this shit's trading I wouldn't be surprised to see it drop much further. Does it make any sense? Not to me but I'm convinced every time I buy it goes down another 2-3% if not more. Every time I execute a trade on fundamentals I get hog tied too so, I'm going against my instinces now and it's worked out pretty well so far. Timing's a bitch though with these PM's sometimes.

I'm saving in US dollars because I'm pretty sure when the euro shit finally hits the fan it won't be a pretty picture for anything... at least that's what I'm counting on. If I'm wrong and the euro "collapse" causes gold to "shoot to the moon" then whatever, I still have some, just not as much as I want.