The shackles on gold might be rusting through II

Bill Murphy, Chairman of GATA (Gold Anti-Trust Action), wrote on Thursday that in his 27 years in the futures markets he had seldom seen as thorough a bashing as what gold received on Wednesday – not so much the extent of the move (from $ 324 to $ 318) as the degree to which buyers were stamped out of a presence on the futures market by means of massive supply.

He continued, almost apologetically, by saying that in terms of his experience it will take a good deal of healing time before buyers can resurface and take on the sellers again.

On Thursday it seemed that his warning would materialise; the gold price was sideways to lower during the day and into the US close and this carried over into early Asian trade. By 0600 SAT, with Tokyo still with 2 hours of trading time left, the price dipped below $ 318 as if to extend the down trend. Then it reversed direction and moved higher – not by much, as it only reached $ 318,65 by 0800 when the Tokyo market closed. Later, after Europe had opened, the price was taken to $ 319,05 before it got beaten down again – behaviour that is almost par for the course and seemingly right in line with Murphy’s pessimism of the previous day.

Yet, another bottom reversal had the price moving higher again; and the rising trend most surprisingly remained intact during US trade and into the close. For a while the trend was sideways, but in late trade the price rose further to end the trading day just above $ 320.

It is still too early to call this move a refutation of Murphy’s bleak forecast. However, if the little bull could grow larger horns into this week, it would be another display of the resilience that has gradually been developing in the gold market. There was a time when bad news for the bullion market would knock the gold price for a loop for days to weeks on end. Then, during the bull market that began 20 months ago, when gold got dumped on the counter-reaction followed within just a day or two. More recently, there were even instances where the gold price slipped badly under a full bout of Comex selling during US trade, only to rebound when the Asian or European markets opened.

Now we have had an event that shook people with many years experience of the futures markets into believing that gold will require a good deal of time to regroup and to begin another challenge on the resistance at $ 325. Yet we find that the yellow metal is showing signs of life within not much more than 24 hours. And on the Friday too, which is a day on which gold has shown itself to be quite vulnerable to any selling pressure.

It is not yet clear whether the usual heavy Comex selling materialised late on Friday. If it did, there was no evidence of such in the price of gold; bullion held firm, if at times a little sideways, and then ended on a firm note. This would imply buyers are back in force.

If no such selling materialised, it would imply that sellers are running out of ammunition. Based on past practices, it serves the interests of the gold shorts to have gold end the week on a weak note, not showing life just a day or so after a heavy bashing.

Either way, therefore, this is very good news for gold.

The gold market appears to be tightening. There is anecdotal evidence of this in the form of someone who was assured by the large bullion dealers that there is ample supply of gold in the market and that it would take just two days to acquire an amount of 20 tonnes (640 000 ounces). When he placed an order for 40 000 ozz some 3 weeks later, he was told that the market had become tight and that it would take 2 days to fill his order – which was one sixteenth of the volume that earlier had “presented no problem”. Further, he was told that if he placed another order it would require all of two weeks to complete.

If this situation is still developing, it could supply the answer to why gold recovered so quickly after the sell-off last week – or at least showed early signs of recovery. It would mean that there is insufficient physical supply to keep the price under pressure, probably because any decline in price drags many new buyers out of the woodwork.

If this is a valid interpretation of events, the next few weeks can become quite interesting!