Gold has been consolidating for 4 months, trading mostly within the $1,075 – $1,150 range. The last few times that gold consolidated in this manner, it was resolved with an advance of around 30%. There is no guarantee that the same pattern will emerge this time around, but it looks as if we may be coming close to the end of this current period of consolidation. At most, we might get another month or two of sideways trading, but I anticipate we will see gold break decisively higher before June with a minimum price target of $1,400 by the end of the year.
Very large traders the CFTC classes as “commercial” reduced their collective net short positioning by a large 16,132 or 7.2% to 207,691 contracts net short. As measured against all COMEX open contracts, the commercial short positions dipped from 45.2% to 44.5% of all COMEX contracts open. This is very bullish news for gold.
Silver is still my preferred precious metal and I feel confident it will outperform gold by a significant margin in the coming years. Silver is also thought to lead precious metals higher, which is a bullish sign considering its recent performance in this chart.
The bond market is in trouble and the Fed will need to start monetizing a greater portion of the debt. This is going to facilitate a transition from the current state of deflation to a period of powerful inflation. As the Fed increases printing and debt monetizing, foreign central banks will stop buying U.S. debt and countries such as China, Japan and Russia are going to aggressively begin to dump their treasuries and dollar reserves. The dumping of U.S. debt started largely in Q4 of 2009, has continued during the first quarter of this year and and I fully expect this trend to accelerate throughout 2010 and into 2011. The debt has simply become unmanageable and can only resolve in default or hyperinflation. Those that think otherwise are simply burying their heads in the sand.
The CFTC’s recent hearing on position limits was quite the spectacle. A whole drama ensured in which GATA‘s Bill Murphy disclosed details of London trader Andrew Maguire who had first-hand experience with JPM traders bragging about how they profited from the manipulation of the gold/silver markets. Mr. Maguire walked the CFTC through how the manipulation would occur prior to the February take down and in real time as the manipulation transpired. Despite the events unfolding exactly as he predicted, the CFTC did not invite him to speak at the public hearing and did nothing to stop the manipulation. When Bill Murphy began to speak at the CFTC hearing, the video was mysteriously cut and then resumed when he finished. Interviews he had schedule with the mainstream media were abruptly canceled and the very next day Andrew Maguire was involved in a hit-and-run in London that landed him and his family in the hospital. He gave his first interview to King World News a few days later the news website was hit with denial of service attacks and taken down shortly after the interview was posted. Talk about a made-for-tv docudrama!
I am not convinced that the CFTC will do anything to stop the manipulation. However, making the manipulation public has obviously ruffled some feathers and the banks must feel a bit threatened by the exposure. I believe it can only lead to good things for precious metals investors and has significantly increased the chances of something being done, even if those chances remain remote. If position limits were imposed or the publicity were to force JPMorgan and other banks to end their practice for fear of legal consequences, then we could see the artificial manipulation lifted and a short-squeeze ensue. At the very minimum, such an event would quickly push precious metals to new all-time highs. Even without a short squeeze or action from the CFTC, gold and silver look to be ending their consolidation period and poised for a huge breakout in the near term.
We have been using the current consolidation period to build positions in undervalued junior gold and silver miners and royalty companies. While gold was up just 1% today, our three latest additions to the Gold Stock Bull portfolio were up 5% or more. If you would like to view the GSB portfolio, receive email trade alerts and get the monthly contrarian newsletter, click here to become a premium member.