Print 
PDF
BookmarkGold looks determined to break free of resistance around $1,250, Eric, but it is still struggling to clear this hurdle. After the break above $1,250 on Thursday, there was some decent upside follow-through on Friday. I had hoped that today would be a good one too, even though option expiry begins tomorrow…
With the ongoing manipulation it was too much to hope for.
Time and again we have seen how the central planners and their bullion bank agents try to push gold lower on option expiry so that as many calls as possible expire out of the money. This week looks like it is not going to be the exception I was hoping for. The shorts have circled their wagons in another attempt to contain the upside breakout, at least until option expiry is completed by the end of the week.
But I really do expect that in one of the upcoming option expiry weeks in the not-too-distant future we will see the opposite result. The bullion banks will put upward pressure on the gold price by buying gold in order to remain delta-hedged going into option expiry. That buying could then result in spectacular fireworks if the option holders, who are entitled to receive metal delivery under their option contract, actually ask for ounces of gold instead of dollars.
Anyway, we will leave that for a future option expiry week because what we are seeing today is the same old market intervention from those forces that disrupt the free-market process as they pursue their objective, which is to keep gold from freely trading and from reaching its fair value. So we will probably have to wait until later in the week before the gold price starts pushing higher again and away from the $1,250 level, which for now still feels like it is a magnet pulling the gold price toward it.
But regardless, Eric, the gold picture remains very bullish. And as a consequence, we should watch the next few days carefully. Option expiry begins with the Comex February gold options expiring tomorrow. So based on past results, gold will likely be at a low point in the morning around 9.30 AM (EST). Thereafter the OTC options start expiring and will continue to roll off over the next couple of days. So gold may remain quiet and under pressure during this period based on experience.
But let’s wait and see. It is always possible that gold could start moving up after the Comex options expire, and then continue higher through the OTC expiry. If so, it could be the start of something big. It could be a signal that the short squeeze in the physical metal is starting to take hold.
I say this because evidence that a short squeeze has already begun can be seen in the way silver is trading compared to gold. Gold is outperforming, which is unusual at the resumption of any new uptrend beginning after a long correction — which describes the current state of the precious metals markets. Normally silver leads because its market is always tighter than gold for the simple reason that the above-ground stock of available silver is much smaller than that of gold.
The gold/silver ratio on Wednesday of last week – which is before gold broke over $1,250 – was 62.5. In two days the ratio jumped to over 64, so clearly silver was not keeping up with gold. The reason for this outcome is that a panic for physical metal normally starts with gold and then spills over into silver. So what we are seeing here is not the normal beginning of a new uptrend when the precious metals break out of a base. Instead, gold’s outperformance is an indication that the demand for physical metal is indeed taking hold and being reflected in the gold price relative to silver.
Gold is still seen worldwide as the primary monetary safe haven, so not as many people are paying attention to silver. There are many reasons for this lack of attention. They include the fact that silver is still below its January 1980 high. Also, silver is now usually seen as an industrial metal, even though in reality silver is a gold substitute.
Silver can provide the same safety that gold does because silver also is a tangible money outside the banking system. During times of panics, this usefulness as a safe haven makes the demand for silver as money greater than its demand for industrial uses. But this change in demand starts only once the squeeze in gold begins, and market participants start looking for other safe havens.
But here’s the really interesting point, Eric: The physical market for silver is even tighter than gold, so once the money starts moving into silver, the silver price will not only start outperforming gold again, it will take off like a rocket. The key level to watch is a drop in the gold/silver ratio below 57.5. Once the ratio falls below that level, the odds suggest that the precious metals market will have turned in silver’s favor, and the silver rocket will have launched. This will mean the official end of the bear market in the metals and much higher prices for both gold and silver.
