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Gwalia''s forced bankruptcy hints at a cruel search for gold in hand
Never mind gold's price, look at volume
By John Brimelow
CBSMarketWatch.com
Monday, August 30, 2004
http://cbs.marketwatch.com/news/story.asp?guid=%7BD347F5DB%2D50E2%
2D487B%2D8131%2D45FDE3802A2F%7D&siteid=mktw
NEW YORK -- 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.
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 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.
Refco 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.
----------
John Brimelow, based in New York, has been a precious
metals analyst for more than 20 years. He also is the
brother of CBS MarketWatch columnist Peter Brimelow.
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