Never mind gold's price, look at volumeNever mind gold's price, look at volume
By John Brimelow
Last Update: 12:01 AM ET Aug 30, 2004
NEW YORK (CBS.MW) -- Gold is back above $400 (again). Last week, it seemed to stall (again). But look below the surface.
Peering closely, I see three factors at work:
First, India, the world's biggest gold importer, was unfalteringly a buyer right up to the high of $412 this past week. I gauge Indian off-take by looking at the local premiums. (Read related column.)
Previously, Indian buying has been choked off at these levels. And the busy season for gold purchases in India is only just beginning.
Inevitable outcome: A great deal of metal will go to live in India this fall -- unless world gold moves up sharply from the $400-plus level.
Second, the Middle East also appears to have become gold-hungry. It's more difficult to follow, but those local premiums I can access have started to suggest this.
So do recent reports of quantities traded. Turkey, for instance, imported a record weight of gold in July.
Conclusion: the physical demand for gold is ratcheting up to support the price.
Thirdly, and below the surface, the past two weeks have seen extraordinary increases in Comex (New York Commodities Exchange) open interest, which have accompanied gold price recent moves.
"Open Interest," is the total of futures contracts outstanding. An increase occurs when a buyer bids to acquire a contract -- a promise to deliver -- and is accommodated by a new seller. Or, when a short seller is accommodated by a new buyer.
Since Aug. 12, open interest has gone up 24.6 percent, 54,749 contracts, equivalent to 170 tonnes of net gold buying. This includes one day, Aug. 19, where the rise was apparently the second highest on record.
In other words, gold volume has been huge. It's just the price that has been boring.
The surge in open interest tells us good and bad news. Good: huge buyers have appeared. Bad: so has a huge seller(s).
Who are the buyers? The most popular theory among gold bears: a big mining house trying to eliminate a hedge position.
I think this is unlikely. No one producer is big enough.
My guess: Some U.S. hedge funds are buying gold because they think the geopolitical/economic is unstable. So are large operators from elsewhere, partly responding to the same anti-American sentiment which that is driving the retail Middle Eastern markets.
Next question: Who is the seller? After all, someone has to have taken the other side of the trades.
To me, it has to have been a central bank. There is simply no other long (or short) around with this kind of size, or courage.
There is increasing evidence that the gold market is being manages by the official sector. Imperative reading for serious gold followers is money manager John Embry's discussion of gold manipulation at Sprott.com.
Ultimately, central bank supplies will be exhausted. Revco Research, the adroit Chicago-based traders, bravely went long on Friday, reasoning that selling of this magnitude cannot persist.
Gold's price breakthrough will be fortune-making. In the meantime, a modest rise to a level which will temporarily slow physical buying is very likely.
If gold passes its $431 March high, it will be at a level not seen since the mid-1980s.