Summer is traditionally a slow season for precious metals, but this summer started with a rout. In the last week of June, gold and silver hit two-year lows of $1,192 and $18.61 respectively.
Fortunately, after staggering along the lows, the precious metals are off to the races once more — with gold rallying more than 18% and silver 31%. This remarkable performance continues even in the face of the Fed's sustained tapering threats.
The exhaustion of short-sellers paired with insatiable global physical demand has positioned gold for an exciting conclusion to a volatile year.
Back to the Futures
In last month's Gold Letter, I explored the likelihood of a dramatic short squeeze in the gold futures market. With record short positions facing a rising gold price, I anticipated that short sellers would have to cover their bets by buying back the contracts they sold short, and in so doing, drive the yellow metal higher.
While a full-scale short squeeze has yet to develop, speculators have abandoned their record short positions in gold. In each of the first three weeks of August, futures speculators increased their net-long positions, and by Aug. 20, money management accounts had grown their net-long positions to the highest since February. The futures market reversed course so much that by the third week of the month, gross short positions were at their lowest since April.
That's quite a turnaround during a season usually ruled by the bears. Just as I forecast, this about-face in the futures market was likely a big factor in gold's resurgence.
However, even more important than the action in the futures market is the sustained demand for physical gold worldwide.
Staggering Physical Demand
As Western investors flip-flop on whether or not gold remains a good buy, Eastern and emerging market investors have jumped on these low prices as an unprecedented buying opportunity. At this point, the data supporting physical precious metals demand is so great that it's easier to just list a few highlights from the second quarter of 2013:
·53% more bullion was purchased worldwide this quarter than in 2012 year-over-year (YoY).
·Demand for gold jewelry worldwide grew 37% YoY.
·Global coin and bar demand hit a quarterly record of more than 500 metric tons.
·For the 10th consecutive quarter, global central banks increased their net gold reserves.
These figures should come as no surprise to anyone who has been following the economies of developing nations. The Indian rupee hit a record low in the last week of August, and South American countries are experiencing tragically high inflation. In particular, the foundering Brazilian currency has hit a four-year low on the back of an official inflation rate of 6.15%.
Maybe these facts are part of the reason short positions are unraveling, or perhaps it was the news of record foreign selling of US Treasuries in June, totaling $40.8 billion.
Treasuries aren't the only U.S. asset being dumped — the Indian, Indonesian and South African central banks have all been selling dollar reserves this summer as well.