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The Bullion Report For Nov 16, 2011: Eye of the Beholder

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Nov 17, 2011 2:48 am

Is gold below $1,800.00 cheap? Or are prices for precious metals approaching critical mass? To answer either question, much depends on your point of view. When you examine available data it appears as though many participants, including those who have prior experience at investing in gold and who play a significant role in the financial markets, aren't looking to sell. In fact, they are acquiring even larger positions. The question is: Are they acquiring metals in spite of or because of current prices?

[i]Past performance is not indicative of future results.

***chart courtesy of Gecko Software[/i][/center]

The Wall Street Journal reported that managed money funds added to their holdings in gold and silver the week ending Nov. 8. According to the CFTC's weekly trading data (which came out on Monday, November 14, because of the U.S. Veterans Day holiday), “Managed money funds bought 16,697 long positions, or bets prices will rise, and slashed 2,052 short positions, or bets prices will fall.” That these are professional money managers is significant to me.

That Commitment of Traders (COT) report specifically showed that funds increased their net long position to 167,028 contracts, from 148,729 positions the previous week. That is a change of 12%. This means that as a group, managed fund net long positions (longs minus all shorts) represents around 16.7 million troy ounces of gold. Take that for what its worth, but it looks to me that professional money managers are increasing their long exposure in gold. It is also worth pointing out is that tactical traders similarly raised their net silver holdings by 5% to 69.59 million troy ounces. These additional long positions came in even while precious metals prices rose. The reasoning behind this is likely tied into the continually-grim global picture.

The European debt crisis continues to unfold like a soap opera, and perchance equally entertaining to some. Recent events, specifically regarding the MF Global failure, have raised margin issues. Additionally, audits and enforcement of rules takes on the forefront as the CFTC announced plans to step up their efforts at scrutiny of firms. The collapse of MFG brought light to those topics and raised concerns (even among long time industry participants) as to the sanctity of money held by clearing member firms. The CME has taken action, but are there actions enough? It certainly seems as though we are fumbling into another round of uncertainty and the accompanying chance of fear.

Sure - regulators and panels of economists seem poised to propose solutions, but their actions may be "too little, too late" for 2011. Investors are growing reluctant to buy European paper. Whether in the form of Italian, Greek, or now French and EFSF bonds, these instruments are all receiving negative press. This gives rise to another big question in terms of where the liquidity will come from to backstop European banks, keep Italian interest rates from skyrocketing and fund the EFSF. Any actions of the European Central Bank seem limited. There are some proposals that China and the IMF can provide liquidity, but as of yet those haven’t made much headway. After all, since the problems are European-made, many think they require a European solution. One suggestion that even came up at the recent G20 summit in Cannes was that Europe’s gold could be put into play. Can you imagine? Could gold be pledged as collateral for loans from China and others?

Germany has rejected this possibility, but that doesn’t mean the ECB and other central banks can’t introduce a proposal that might leverage European gold reserves. That would be certain to get China’s attention. Understand, the possibility of gold being sold directly into the market isn’t what’s at issue. Rather the issue would be using gold as leverage behind loans which is being explored; and rather than sell gold, such a scenario might rather act as an invitation to acquire gold so it may be used as collateral.

Turning the microscope back to the other side of the pond, the United States doesn't seem to be any further ahead in wrestling with its debt problems. The decreased revenue on local, state, and federal levels as a result of the housing and credit crises has spawned a host of issues that seem never-ending. Is there really a recovery on the horizon? Perhaps. It is also just as likely that this is the new version of normal and instead of growth, people must now look to preservation or sustainability.


Presently the price of gold is below $1,800.00. Silver is around $34.50 an ounce. This past year gold prices increased dramatically when the price ran up to a record peak of $1,920.30 per ounce on Sept. 6 and then tumbled to a low of $1,534.49 on Sept. 26.  Prices are closer to $1,800.00 now, but still below. The corrective phase, which many professional traders view as healthy, seems completed. Where are prices headed next? Heading towards the holiday season and the end of the year, it seems likely that little will happen to fully resolve the debt issues plaguing certain countries. That seems supportive of precious metals despite their high prices. Asset preservation continues to look like the best gift that investors want to give themselves, and that means gold and silver for the time being.

[b][i][u]Disclaimer:[/u][/i][/b] The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.