Preparing An April Surprise?

The campaign against gold that had started in early 1996 when the price broke above $400 to upset the powers that be has entered a new phase. This is the third time in my memory that the PM market stands at the brink of what could become a new and possibly deciding stage of the contest between the Gold Bulls and the establishment.

The battleground appears set to expand its boundaries for the first time to include the small trader/investor in numbers that might make a difference to the behaviour of the market. Whether this observation holds true will be determined by what happens at the end of April, all else being equal.

When the price of gold broke higher above $400 in 1996, after having spent about 18 months in a tight sideways trend, the break was soon reversed in what in due course became a sustained if interrupted trend that reached down to $250 – a decline close to the Fibonacci ratio in about 4 years. The price suppression was achieved by leasing gold to bullion banks at 0.5%, which is then sold to fund the purchase of long binds, then at a yield above 6.5%.

The trend was twice interrupted, by the collapse of the Asian Tigers and the Russian bank default, only to be restarted by the Bank of England auctioning off much of their gold and the Swiss announcing their intention to sell half of their gold. When the price approached $250, it became clear the mines would close down and this would mean that there would be no sources of new gold supply when the leased gold was to be returned. By 2001 the price of gold had made a near double bottom and started the second phase, a bull market that took the price to near $2000, for an almost 8-fold increase in ten years.

It was during this phase that the price of silver suddenly reared its head out of a long sleep that followed the Hunt brothers’ sabotaged attempt in the 1970s to corner the silver market. Their long term view of silver’s future was correct; however, if their effort had succeeded, the price of gold would also have rallied steeply, years before the bull market of post-inflationary early 1980s. Since this happened shortly after the London Gold Pool had publicly failed to keep a lid on the price of gold and Nixon had had his day, a reason for gold to rally was the last thing the authorities wanted.

Leasing and selling gold into the open market was no longer a practical means to keep the price of gold – soon joined by that of silver as well – under control. The solution was to recruit the Comex futures exchange to assist the Big Banks to continue their price suppression by means of short selling metal futures. The key to the success of this change in tactics was to switch accepted price discovery for the metals from the LBMA fixes in London to the prices quoted on Comex. It is not clear how this was accomplished, but that this happened became a fact of life to re-establish control.

Silver joined gold in the 2008/2011 bull market to reach close to $50/oz, to become the main target of the third phase – the extended post 2011 bear market in precious metals that in effect is still in progress if we assume the May 2020-August 2020 was no more than an exciting bear market rally. For reasons probably related to reduced silver reserves in a world where the metal played an increasing role in industry, silver had become the Enemy Number 1 of the Big Banks. Post 2011 the price of silver was suppressed more severely than that of gold and more recently it was twice a special target in order to push the price below where very large positions in silver options and futures would be in the money.

The four-month rally in the prices last year gave the Cabal a fright and the prices were forced lower since early in August after gold broke above $2800 and silver reached to $29. In September silver was suppressed by almost one third off the recent high to ensure that a large number of options taken out long before would expire below their strike prices. After rallying to near $26, in late November silver was again suppressed close to $20 and gold to below $1775 to prevent widely purchased December options and futures from becoming an embarrassment for the big banks.

The CoT charts below show the next positions of different traders’ classes for the past four years. Swap Dealers are grouped with the Commercials (red line) in the upper chart and presented separately as the green line in the lower chart. The large specs (green line in upper chart and dark line in lower chart) effectively are counter parties for the commercials. Their net long positions are smaller than the short positions of the commercials to reveal they favour spread positions, a little more long than short.

It appears the commercials are still short of about 50 000 silver contracts – that is 250 million ounces or close to 8000 tons, or an additional billion dollar loss for every $4 increase in the price of silver.

After ending 2020 with a very successful second half behind them, 2021 started with an unpleasant surprise for the banks. GameSpot illustrated anew how much damage a short squeeze can do when taken to extreme and the Big Banks panicked, because the REDDIT Apes, many of them flush with funds from their GameSpot success, have changed their focus to silver as the next short position to target. The attacks on gold and silver went into high gear to try and reduce their short positions.

Since the long term gold and silver Bulls displayed great resilience in the face of even this new attack, its duration and intensity was extended, firstly to reduce the number of profitable options and April futures in both metals and secondly to induce the large specs to change their spreads to favour short positions. As can be seen, this aspect of the strategy of the banks is bearing fruit – the net long position of the large specs is shrinking and so is the net short position of the commercials. However, still at 50k net short, the latter still poses a far too large risk, what with the May options and futures looming at the end of April.

The mass activation of the REDDIT Apes into the silver market to attempt a short squeeze has changed its whole nature from a power play between the Big Banks and the silver Bulls, to a desperate rear guard action by the commercials to reduce their exposure to risk. They surely had always known there would have to be an end to the suppression, but probably always believed it could be engineered on their terms. Now they risk losing their long time quite successful control of the silver market and – as is bound to happen then, also of the much larger gold futures market by value.

From mid 1996 to the end of 2020 the Commercials had effective control of the gold market, and for most of 2020 also of silver. Granted, not long after their over-reach to push the price of gold near $250 at the turn of the century, they had to contend with the 2008-2011 bull market. Yet, as they had to yield before rising demand for cheap gold, they managed to renew their near total control of the PM market using Comex as the lever.

This is about to change in what should become the fourth phase of the suppression of the metal prices, leaving out the failed attempt of the London Gold Pool. Paul Volcker, Fed Chairman from 1979 to 1987, later confessed that he did not control the price of gold during his term as being a significant mistake of his term at the helm of the Fed. This lax treatment of gold changed in 1996 when the price of gold broke above $400 and Clinton’s ‘strong dollar’ policy demanded that gold should not issue any warning that something is wrong in the financial system.

While currently still holding above their post 2011 lows, the prices of gold and silver might be reaching the end of the near 10-year volatile bear market. The odds are that a new bull market is now waiting in the wings, largely a consequence of the REDDIT Apes and their intended bear squeeze in silver, which has ignited widespread attention on silver, including among despondent long term bulls. The silver Apes have learnt a good deal from the abortive attempt to shake the market at the end of February and they will put that knowledge to use during April, in preparation for the May futures at the end of the month.

Knowing what is likely to await them at the end of April, the logical course of action for the Cabal is to relax all selling and let the prices of gold and silver rise as steeply as possible without triggering an out of control bull market. This is to afford new bulls with the least opportunity to go long of May options or May futures at low prices. Then they can again attack the market later in April to limit the number of options in the money and profitable futures as much as possible.

The counter strategy for the Apes and friends would be to buy what is on offer on Comex and target the physical metal in retail shops and at PSLV. Then to wait in ambush late in April when the selling commences and Comex silver will be available in volume, with sufficient contracts standing for delivery at the again low prices to clean out the Comex vaults. If this happens, we could see a repeat of what happened last May/June, but this time with no sudden end the bull market, as had happened last year in August.

Speculation and supposition, but well within the realm of the possible. The fight-back could be in full swing soon.

As mentioned here before, debt is a four letter word. Like some other such words, it should be used most sparingly, only when circumstances really require its use. With rumours of another $3 trillion of spending being planned, the increase in national debt could be speeding up. Granted, it might not be in the form of ‘helicopter money’, but intended for investment in infrastructure – what the Chinese have been doing all the time, in preference to handouts to the people.

However, if inflation should cause rates to increase, this new debt would become an albatross around the neck of the US economy, perhaps before improved infrastructure could deliver the returns to afford the higher interest cost. It is also easier to open the money taps than to turn them off or even to close them half-way.

Euro–Dollar

Euro–dollar, last = $1.1780 (www.investing.com)

The euro briefly broke below its bear channel UV to signal further weakness, but then rebounded barely back into the channel and also back into channel CD. The break below bull channel WZ is, however, still holding. The strangely strong dollar index is still holding above 93 despite all the money printing and the euro is not out of its bear phase as yet. It will have to recover fully into channel YZ to inspire any confidence in the European currency.

DJIA daily close

DJIA. last = 33153.21 (money.cnn.com)

Last week, the DJIA failed to achieve another all time high, but on Friday the S&P500 managed to do so, with a first time close above 4000 points. The chart of the DJIA is extending the post March 2020 rally, after the Covid induced steep correction in a manner that is reminiscent of 21 years ago when the dot.com rally neared its end.

That rally was fed by exuberant optimism that tech had all the answers and would be the source of near unlimited profits. In almost each niche of the market there were ten or more corporations competing for investors, all of these promising better than 20% market share when the dust finally settles. Not many of them survived to shake off the dust and continue their activities.

This time around there are again favourites that attract the most attention, most of these among the heavyweights that float the main market indices to inspire more optimism that the bull is here to stay. However, as history clearly shows, somewhere in the wings the Bear is waiting for his cue to step up and occupy centre stage.

Gold London PM fix – Dollars

Gold price – London PM fix, last = $1726.05 (www.kitco.com)

Last week it was thought the earlier rebound off line G implied that the price of gold would hold in terms of the London PM fix above $1707, despite the FND on Monday, 29th March. The Cabal had another plan and gold was suppressed enough to have the London fixes on Tuesday and Wednesday below the $1700 level.

In one of those strange coincidences that often repeat at similar times of the month, yet never attract the attention of the main media, the price of gold began a recovery almost as soon as FND was history. The preliminary Comex report shows that some bulls were not scared of entering the market before the Easter weekend – a little more than 2000 new gold contracts were added to the open interest on Thursday.

The rapid rebound, once it started, indicates the Cabal do not want to accumulate too many new short positions at these low prices. As discussed earlier, the Banks are facing a crisis and they have to try and manage what is happening as best they can.

They need to set up another rally in preparation of fleecing the bulls that will buy at the high prices later during the month. Depending on how much enthusiasm can be ignited by the REDDIT Apes, the Cabal then might need to pull out all the stops to ensure they are able to counter the attempted squeeze at the end of April.

Euro–gold PM fix

Euro gold price – PM fix in Euro. Last = €1468.52 (www.kitco.com)

The profit squeeze on long positions in gold on Comex at the beginning of last week on FND also had the euro price of gold briefly breaking below its bull channel JKL. By Thursday, the post FND recovery in the dollar price of gold had the euro price back into the bull channel, but still stuck below resistance at line X.

If the intention of the Cabal is to limit the amount of buying at current low prices, we should see the euro price of gold also rallying further, breaking clear above line X and probably also above line G, to add technical confirmation to the new rally.

Silver Daily London Fix

It is not a surprise to see that the price of silver broke much lower below bull channel JKL than what had happened to gold in dollars and in euro. No surprise either that the silver price, despite having held at good support, has failed to begin a new rally – as if the intention is to keep the price under permanent pressure until the end of April to prevent any chance of success for a short squeeze. If so, this could backfire later; the real threat might not be aimed at Comex directly, but at the siphoning off of the metal out of the overall market while the price remains low.

May is a big month for silver and could become much bigger now if the Apes can rally widespread support among the millennials to accumulate physical silver and get many of the current silver bulls on Comex motivated to add to their positions.

Silver daily London fix, last = $24.315 (www.kitco.com)

U.S. 10–year Treasury Note

U.S. 10–year Treasury note, last = 1.673% (www.investing.com )

Holding the break above channel XY is a signal that the bear trend in bonds is well-established and can afford the time to consolidate what the Bear has achieved. As long as the yield remains above 1.62% to hold the break above channel XY, it is assumed that the inflation induced weakness in the bond market will resume in due course. It would not surprise to learn that the Fed is working behind the scenes to prevent bond yields from alarming investors that the trend to higher yields is intact and they should become the rats that flee the sinking ship.

Any renewed weakness in the dollar will add another alarm for foreign investors who are going to suffer a double whammy from rising yields and a weaker dollar should the money printing in the US be continued to help bolster the economy and to ensure the survival of many households who exist below the bread line.

West Texas Intermediate crude. Daily close

WTI crude – Daily close, last = $61.45 (www.investing.com )

The price of crude is also consolidating after an extended increase, much of this in recent months. The break above bull channel XYZ has to hold to confirm the bear trend and as a warning that the trend is expected to resume in due course.

© 2021 daan joubert.

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