It has been an interesting week for gold. On Tuesday, open interest on Comex fell sharply by 6,961 contracts. The action was in the June contract, which fell 12,072, only 3,000 of which appear to have been rolled into the next active month (August). The bulk of the fall in the June number must have been from bears closing their shorts ahead of Ben Bernanke’s testimony to Congress on Wednesday, but we can see from the numbers that the big bullion banks did not supply the stock (see below).
In the wake of his testimony and the release of the FOMC minutes, there was huge volatility in all markets, including a 7% crash in Japanese equities. The trading range for gold was more than $60, as first the bears took fright over Bernanke’s reaffirmation of money-printing policies, when gold rose nearly $30 in ten minutes in a classic bear squeeze with the bullion banks refusing to supply the stock. The market was then driven sharply lower, probably assisted by official intervention lest people get the idea that gold is better than dollars.
The net position of the four largest traders, which we can assume are all bullion banks, on May 14 was long for the first time for as long as records are available, shown in the chart below.
Keep in mind the fundamental difference between precious metals and other financial markets: The former are seriously oversold and the latter seriously overbought. Logic strongly suggests that retreats from these extremes would drive gold and silver up, and equity and bond markets down. Therefore, the action in gold and silver was perverse. The evidence is in the chart below, showing how extreme the hedge fund (managed money) short positions in gold have already become.
Factor in the severe shortage of physical bullion and the conditions for an explosive move to the upside become apparent. This is why the market-making bullion banks would be stupid to close their hard-won net long position, and they know it.