Perfect Storm Sees Gold & Silver Surge – Chavez Gold Action Leads To Backwardation, Short Squeeze And ‘Havoc’ Concerns

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Perfect Storm Sees Gold & Silver Surge – Chavez Gold Action Leads To Backwardation, Short Squeeze And ‘Havoc’ Concerns

Perfect Storm Sees Gold & Silver Surge – Chavez Gold Action Leads to Backwardation, Short Squeeze and ‘Havoc’ Concerns
All major currencies have fallen sharply against gold and silver again today with gold reaching new record nominal highs in Canadian and New Zealand dollars, in sterling, in euros and of course in dollars as turmoil continues in global markets.

In volatile trade, gold is down 1% from new record highs and is trading at 1,860.10 USD , 1,300.40 EUR , 1,126.40 GBP, 1,470.90 CHF and 142,414 JPY per ounce and has risen some 2% in all currencies. Silver has surged by nearly 3% in all major currencies.

Cross Currency Table

The London AM fix was a third consecutive record nominal high in US dollars. Gold’s London AM fix this morning was USD 1,862, EUR 1299.28, GBP 1126.91 per ounce (from yesterday’s USD 1,794.50, EUR 1,246.44, GBP 1,087.12 per ounce).

Markets continue to assess the ramifications of Venezuela deciding to repatriate their large gold reserves from London to Caracas. Their reserves are large in gold tonnage terms but small in dollar terms.

Venezuela’s central bank is the world’s 15th largest holder of gold, with 365.8 tonnes, of which some 211 tonnes, worth $12.3bn are held in London with the Bank of England and JP Morgan, Barclays, and Bank Of Nova Scotia.

Many analysts and the Gold Anti-Trust Action Commitee (GATA) have long contended that much of the central bank gold reserves have been leased out by bullion banks and that in the event of central banks choosing to repatriate their bullion, significant supply issues could develop which would lead to a short squeeze and a parabolic increases in prices.

The concern is that other central banks concerned about dollar and currency debasement and expropriation of their gold reserves by embattled large debtor sovereign nations may follow suit.

A short squeeze is quite likely given the scale of global investor and central bank demand.

Already, there is a small degree of backwardation developing in the gold market with certain near term futures contracts now trading at higher prices than longer term contracts. The near term August ’11 contract was trading at $1871.40/oz while June ’12 contract is trading at $1,870/oz (1216 GMT). The spread between spot and longer term contracts has fallen suggesting that gold may soon join silver in backwardation.

Silver has been in backwardation for seven months now and backwardation appears to be deepening again. This morning the September ‘11 contract is trading at $41.41 while December ‘12 is trading at $40.65.

The possibility of backwardation in gold suggests that major investors are concerned about the supply of physical gold. Buyers are concerned about securing supply in the future and are willing to pay a premium for spot or immediate delivery.

It could indicate that the short squeeze anticipated by many is taking place and we could see a sharp upward move in gold prices.

This would not be surprising considering the very small size of the physical bullion markets versus the size of the overall financial and currency markets and considering the high demand coming from investors and central banks globally.

It is worth remembering what happened when silver went into backwardation some months ago. It led to a price surge from $30/oz to over $50/oz in 10 weeks.

Backwardation rarely happens in the gold and silver bullion markets. Since gold futures first started to be traded in 1972 (on the Winnipeg Commodity Exchange), there have only been momentary backwardations of a few hours.

It suggests that larger gold bars are difficult to acquire in volume and that the physical market is becoming stressed and less liquid.

Backwardation can end in default, failure to make delivery and in sharply higher prices. A default on the COMEX would have important ramifications for the dollar and could see sharp selling of the dollar and sharp falls on global markets.
Gold backwardation has been warned of by newsletter writer Denis Gartman overnight. He said that if Chavez  “does push” for repatriation of $11 billion of gold reserves held in developed nations’ institutions it could lead to backwardation which would wreak ‘havoc’.
Investors should buy “nearer gold” and sell deferred bullion futures, he wrote. October and December futures will trade to premium over February and beyond in this case, Gartman wrote.

Meanwhile, in another sign of gold experiencing a near perfect storm, UBS have said that macro hedge funds were noted buyers and may also have dominated demand during yesterday's Comex sweeps. They said that the funds may have been waiting for a correction to buy but due to concerns of the market moving away from them decided to buy yesterday.

“If participation from the macro hedge fund community has only just started to accelerate, this adds a new dynamic to the gold market.”

In normal financial and economic times, gold would be considered overvalued but we are far from that today and gold is experiencing a near perfect storm which could propel prices higher.

JP Morgan’s call for $2,500 gold by year end does not that outlandish given the fraught financial, economic and monetary conditions today.

A correction remains a real possibility but buying and holding bullion remains the best strategy in today’s volatile markets.

Cost averaging (dollar, euro, pound) is worth considering after the recent price move.

For the latest news and commentary on gold and financial markets please follow us on Twitter.


(Bloomberg) -- Gold May Advance From Record on Growth Concern, Survey Shows

(Reuters) -- Gold hits record on U.S. growth, Europe woes

(Wall Street Journal) -- Central Banks' Demand For Gold Quadrupled In 2nd Quarter

(Wall Street Journal) -- PRECIOUS METALS: Gold Price More Than 1% Higher In Asia‎

(Bloomberg) -- Chavez Emptying Bank of England Vault as Venezuela Brings Back Gold Hoard


(ZeroHedge) -- Cue Panic As Fed Resumes Liquidity Swap Lines, Lends $200 Million To Swiss National Bank, Most Since October 2010

(Financial Sense) -- Gold & Silver: Full Spectrum Dominance

(Reuters) -- Analysis: Gold move highlights risks to Venezuela reserves

(Financial Times) -- Traders prepare for Chávez gold transfer

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bullionbaron's picture

Would like to see the HUI break this H&S pattern and pass the 610 mark, we may then be able to have a run in Gold stocks:

Gold stocks the cheapest they've been since early 2009:

Haywood Jablowme's picture


This parabolic stage is gonna be one hell of a ride.  YEEEEE HAAAAWWWW !!!!!

I've been waiting for $100 swings for a few short years now.  Let's do this shit.


zorba THE GREEK's picture

Backwardation: Greek love making. Those who shorted gold are going to get backwardated.

Strider52's picture

I've heard it many times: You will not get rich on gold, it only stores value, but doesn't pay dividends, and doesn't make a profit. Plus, you can't eat it.

  Well, the Precious is up 50% in one year. I don't think the dollar has depreciated 50% in that same time. But I'm no math genius. Oh, wait...I am.

  Lucy, you have some 'splainin to do.

DosZap's picture


I've heard it many times: You will not get rich on gold, it only stores value, but doesn't pay dividends, and doesn't make a profit. Plus, you can't eat it.


And like the USD IS, and DOES???.


Pladizow's picture

Hopefully this will wake the big boys up, i.e., institutional investors, biillionairs, hedge funds, etc.... to the fact that if they want to move the market (and we know they do) then they should deal in physical!

Pladizow's picture

A university professor did a study where he left 10 students dispersed around New York City with the simple instruction of "find each other". Seemingly impossible?!

However, they all did. Because they all went to Grand Central Station - a historical focus point.

Gold is and will further replace US Treasuries as a focal point and everybody out of fear will rush to meet everyone else there.

"A rally lead by fear will be far stronger then one lead by greed" - James Dines

Manthong's picture

Good perspective.. thanks.

From the Ackerman piece:

“Grandma and Grandpa … they are on the other side of the Federal Government’s good fortune, unable to generate a livable retirement income on a million-dollar nest egg."

When grandma and grandpa figure this out, today’s prices will be cheap.


snowball777's picture

If they can't figure out how to live decently with a paid-off home, a mil, and SS checks, then Grandma and Grandpa should go buy some Medicare D-subsidized Viagra and fuck themselves repeatedly.


Sudden Debt's picture

I hope that's not your plan on how to spend your weekend...


Oh regional Indian's picture


Paper cuts, FTW!

Vivek (My real name, in case anyone is wondering, Hello!)

Strider52's picture

Fight Club Rule # 2: Nobody uses real names at Fight Club.

sunnydays's picture

Blythe having fun this morning?

Bullionaire's picture

JPM:SILVER now negative for 18 days.


Suck on THAT, Blythe.



fuu's picture

Which I believe is longer than when silver was on the way to 50 this spring.

Turd Ferguson's picture

DO NOT be a smartypants top-caller. Sit back and relax while the world burns.

"A correction remains a real possibility but buying and holding bullion remains the best strategy in today’s volatile markets."

cossack55's picture

Have you got my fire extinguisher, Turd?  If so, keep it.

Smiddywesson's picture

Exactly.  The list of lifeboats remaining is becoming alarmingly short.  The healthy currencies like the swissy don't want survivors swamping their currency, and the dollar is being debased.  That leaves gold and silver, and though they can supress silver, they are buying gold.  How do you hold down prices when everyone is swarming into the boat, including yourself?  Central banks are buying, and now here comes the public!!!


I really have to laugh at the deflationist who said gold would tank along with everything else because debt default is inherently deflationary.  They completely missed the fact that the world is awash in paper and there will be nowhere else to hide than PMs.  It doesn't matter how much wealth destruction there is, there's still plenty to push up the gold market.  Academic idiots.

oddjob's picture

You are a smarty pants chartist unnecessarily worrying investors about manipulated short term drops in the PM prices. Is there a difference?

sunnydays's picture

charts and graphs for the day, month 6 month and year of commodities - shows who - Blythe must be sweating right now.

PaperBear's picture

Intra-day highs for Gold of $1,878/oz and for Silver of $42.72/oz.


Smiddywesson's picture

I don't think we will see that for a while yet.  Continued central bank acquisition depends upon keeping gold and silver under control, and they have unlimited fiat.  They will fight back, perhaps using up another two of their precious margin increases.  That would be sweet, because next week we would be right back at the same price and they would have two less margin increases in their gun, and they know it.


scatterbrains's picture

One day we may see  1 grain ingots replace the $20 dollar bill which translates to $9600 per ounce.   I don't watch ebay pricing very closely but it seems lately that  1 grain size transactions are becoming more popular to the common man... or so I'm thinking.

snowball777's picture

Do you get the feeling that La Cucaracha timed this for maximum impact?

"Stand and Deliver!"

lolmao500's picture

Silver needs to go above 60$ to be back at reasonable levels and gold/silver ratio.

FranSix's picture

The Gold/Silver ratio should continue to correct in the onset of credit quality breakdown.  The next correction level for the Gold/Silver ratio is very probably the 89-week EMA on the weekly chart.  The technicals on the Gold/Silver ratio are that gold will continue to gain on silver in coming weeks.

Backwardation in Gold is not great for the price advance, because every backwardation in Oil prices, Copper prices, Silver prices have all preceded a correction.  The more chronic the backwardation, the more meaningful the correction.

So far, the backwardation is only brief.  The spead between spot and futures is not meaningful enough to coax out gold into the markets.

bankrupt JPM buy silver's picture

Ya thats b/c they raise margin 15 times in 4 days, thats why there are artificial corrections

Smiddywesson's picture

The definition of a "correction" is rapidly changing in gold.  It seems TPTB are rapidly becoming TPTW (the powers that were) in this market.  I'm not saying there won't be any corrections.  I'm just saying they will be sharp and brief, and won't help keep the prices from climbing.

FranSix's picture

I can see gold challenging the inflation adjusted 1980 high of $850 (~$2300/oz. U.S.)and then backing off to consolidate.  The timing of this move is difficult to discern as gold has been appreciating during market down days in a very aggressive fashion. 

Hopefully it will let off some steam in the meanwhile, but a crash will bring gold prices down.  I presume the low should be in the $1500/oz. range.

akak's picture

The so-called "inflation adjusted" 1980 high of ~$2300 in gold is only adjusted for the fraudulent, manipulated and low-balled CPI figures.  In reality, the TRUE inflation-adjusted 1980 price peak of gold would be more on the order of $3000 per ounce.

DosZap's picture


<Backwardation in Gold is not great for the price advance, because every backwardation in Oil prices, Copper prices, Silver prices have all preceded a correction.  >

Sure it is, it means we get ANOTHER, yet another shot at BTD!.

Sudden Debt's picture

160 times more paper silver than physical....

100 times more paper gold than physicla....



cossack55's picture

Its funny, I keep my paper gold and silver in the bathroom and my phys gold and silver buried in 4" PVC.  Why is that?

Stumpy's picture

You think vaccum sealer bags will do the trick? I used four layers. I worry about the winter though.

Smiddywesson's picture

Gold doesn't tarnish and squirrels won't eat it.  It's safe

cynicalskeptic's picture

I don't know about that........    seems like some of the gold stored in COMEX vaults is foil covered chocolate.

thunderchief's picture

I hope they do it.  And I hope it leads to other countries doing the same.  The banks have multiple owners on each bar.  That is the only way to have such a bloated paper market.   Get in line for cash settlements Soveriegn Nations.

stateside's picture

Many gold juniors traded in Canada are off 50-75% this year.  Many with 43-101 rated 500,000-1,000,000 ounce deposits have a market cap of less than $15/oz with gold trading at $1,850.  There has never been such a disconnect in the history of gold/junior gold stocks.  Either gold will trade down to $500/oz, or we are on the cusp of one of the greatest bull markets of all time in the Canadian gold juniors that will make the internet stock craze look like child's play.



Stumpy's picture

Let's say I don't regret conselling my girlfriend buying a considerable chunk of her retirement funds on ZJG (BMO Junior Gold). Don't look at it for 10 years babe, and then, thank me.

mayhem_korner's picture

She's gonna want a Kardashian-sized engagement ring, y'know.

Stumpy's picture

She's a low-maintenance-cost darling. A saver, not a spender. And she's disgusted by celebrity gossip. A keeper!

Flakmeister's picture

Hell, don't look at it for 10 months...

Frog-And-Toad's picture

Can you please elaborate on what a junior miner/junior gold is?  I am unfamiliar but interested

Roger Knights's picture

Seniors are the large miners; the ETF for them is GDX.

Intermediates are smaller; their ETF is GDXJ (misnamed "Juniors")

Juniors are smaller still; some are producers, some are explorers. Both can be found in the ETF GLDX.

Flakmeister's picture

I concur.... There are companies that are hideously cheap.

Oh regional Indian's picture

Unless they are hideously hedged?