Wikinvest Wire

A gold market "squeeze"?

Monday, April 20, 2009

A lot has happened since the yellow metal was last talked about here. The flow of gold bars into the ETFs has reversed direction and, after a surge in scrap supplies and a buying strike, bullion has stopped moving out of India and imports have resumed.

As might be expected, prices have plunged, but things are looking up today. In this Business Bullet from the Telegraph, at least a few analysts think higher prices might be ahead.

If you play the video, be sure to stick around until about the 1:10 minute mark as you'll see Chancellor of the Exchequer Alistair Darling holding up a tiny little briefcase.

Ambrose Evans-Pritchard files this report on a possible gold market squeeze, although there appears to be something wrong with that "inflation-adjusted" gold price of $1,560 in the second paragraph - based on U.S. inflation, the figure is closer to $2,200.
Charles Gibson, a gold expert at Edison Investment Research, argues in a new report that negative real interest rates (below inflation) in the US and beyond has upset the "leasing" machinery in the gold industry and led to a sustained market squeeze.

This is what occurred in the late 1970s, driving gold prices to $850 and ounce – roughly $1,560 in today's terms. Gold finished last week at $870.

Mr Gibson said the powerful dynamic could lead to a second leg of this gold bull market, even though the metal has already enjoyed a torrid run over the last eight years.

In normal times, gold mining companies sell – or "hedge" – a chunk of their output in advance through bullion banks. These banks cover their positions by leasing gold from central banks. This bread-and-butter trade created excess supply of 500 tonnes each year until the start of this decade.

Low real interest rates have caused the process to reverse, creating a shortfall of about 500 tonnes. The process accelerates as rates turn negative, leading to a scramble by market players to find physical gold.
The gold market needs something to revive it these days.


Anonymous said...

Why does the gold market need something to revive it? How come it cannot just be what it is? I'm not kidding.

There's no squeeze. Your positions maybe incorrect, but there's no squeeze.

Evan said...

How is Tim's comment any different than the doofs on CNBC saying that we deserve the rally last week? Or that the Dow "belongs" above 10,000?

Anonymous said...

The above comment on the working of the system makes no sense.

If the miners were selling forward to the bullion banks then the bullion banks are buyers. Then in order to offset their position they would need to be a seller in some other position. The explanation that they lease gold from the central banks does not offset their buying position from the miners, it doubles their long position!

Anonymous said...

Does anyone know if Charles Gibson's article is available online?

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