What Golden Secret is the Federal Reserve Hiding?

Gold's low price on Friday was at 2:00 p.m. during Hong Kong trading... the moment that Sydney closed for the weekend. From that point, a gentle uptrend in price began that ended with a quick two dollar jump at 11:00 a.m. in London. From there it flat-lined until the Comex opened in New York a couple of hours later. Then the price went vertical as a huge buyer showed up. This $13 move lasted fifteen minutes before it got stepped on at exactly 8:30 a.m. From that point on, gold was not allowed to trade above $955 for the rest of the day. The usual New York gold commentator said... "Today's opening burst of buying was even more marked -- estimated volume by 9 a.m. of 52,212 lots was 60.4% of the day's estimated volume of 86,362 contracts. Dealer commentaries refer to lack of liquidity; but any serious buyer seems to meet prompt supply. [Paper gold supply - Ed] It is true, however, that when the buyers stopped, gold promptly went to sleep. Only 18% of the estimated volume traded in the second half...after 11 a.m."

Silver's move was similar... but it's price spike at the Comex open wasn't as dramatic. However, the move from it's Hong Kong low to its New York high was almost 70 cents... which, in and of itself, was quite impressive.

Open interest in gold on Thursday's minor down day showed open interest down 2,454 contracts to 371,771... on light volume of 57,354 contracts. As I said Friday morning... Thursday was a nothing day. In silver, o.i. fell 862 contracts to 101,220... on volume of 31,341 contracts. Yesterday's dramatic price action will certainly bring a deterioration in open interest when the report becomes available on Monday... as I doubt that any of the buying [anywhere in the world] on Friday was short covering.

I was underwhelmed by the Commitment of Traders report for silver [for positions held at the end of trading on Tuesday, August 18th] that came out yesterday. The bullion banks' net short position rose again, this time by 775 contracts. Without doubt, there's been quite a bit of improvement since then... but it was a disappointment nevertheless... as both Ted Butler and myself were expecting better. Did everything get reported that was supposed to be? Don't know. As of Tuesday's cut-off, the bullion banks were net short 215.6 million ounces of silver. The full-colour silver COT graph is linked here.

In gold, things were somewhat better, as the bullion banks reduced their net short position by a very chunky 18,360 contracts... but they're still massively short this market, with their current net short position at 20.5 million ounces. This number doesn't give me much comfort. The full-colour gold COT graph is linked here. When you look at this graph, you'll see why I'm not impressed... as the bullion banks have been short this amount since the middle of February.

I'm still concerned about a gold-sell off that will take the price of silver with it. Ted Butler feels that way too, but is more optimistic about things than I am. He had an interview with Eric King of kingworldnews.com yesterday, and his comments on the COT are included. Ted also says that JPMorgan has probably already hedged its silver short position in other markets. So you should stop reading here and listen to what else Ted has to say... because it's important... and the link is here.

The Comex Delivery Report on Friday showed that no gold or silver contracts were delivered... and there are still about 271 gold contracts still to deliver this month. And, as a bit of a surprise, there are currently 93 silver contracts still outstanding for delivery in August. That may not seem like a lot, but when I checked earlier this week, it showed only 3 contracts left to be delivered in August. The GLD ETF showed that a smallish 29,439 ounces were added to their alleged holdings... and their were no changes over at SLV. The U.S. Mint had another update yesterday... an additional 7,000 gold and 75,000 silver eagles were added to August's totals. And over at the Comex-approved warehouses... 338,759 ounces were added to their silver inventories.

Besides his prior comments in this article, the New York gold commentator added..."With a confirmation of life in New York, and the Indian buying season starting up, gold's friends had a congenial close to a [rather trying] week."

Today's 'Chart of the Day' is a real stunner. It shows how the recent plunge in earnings has impacted the current valuation of the stock market as measured by the price/earnings ratio. From 1936 into the late 1980s, the P/E ratio tended to peak in the low 20s and trough somewhere around seven. As a result of the recent plunge in earnings and recent stock market rally, the P/E ratio spiked and just peaked at 144... a record high. Currently, with 97% of U.S. corporations having reported for Q2/09... the P/E ratio now stands at a lofty 129. I thank Kevin Vick for sending this along. The chart is courtesy of chartoftheday.com... and the link is here.

Here's another chart that's worth looking at. This one is from The Economist out of London. It's headlined "Purchasing Power: The 'Big Mac' Index". The story itself is only one paragraph long... and accompanies an excellent chart of how many minutes of working time it takes to buy a 'Big Mac' in various cities/countries around the world. I thank P.S. for sending this along... and the link is here.

I have a lot of stories today. The first two are courtesy of the King Report. From the Financial Times in London... "Corporate bond defaults hit record"... The number of companies defaulting on their debts has risen to record levels this year, according to Standard & Poor’s, while investment returns for risky corporate debt have skyrocketed since January. S&P said 201 borrowers with $453.1 billion in debt have defaulted this year, exceeding the 126 defaults for all of 2008, which comprised debt worth $433 billion. The link is here.

And from The Mortgage Bankers Association... "The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009"… The delinquency rate breaks the record set last quarter… The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey. The link to the whole story is here.

There was a brief one-paragraph story posted over at marketwatch.com headlined "China becomes Japan's Biggest Trading Partner". There wasn't much to that story, but over at zerohedge.com, Tyler Durden had a lot more to say about it, and it wasn't happy reading. It's not a long read... but it's a 'must read'... and I thank Craig McCarty for sending it along. The link is here.

And last but not least, is this longish read posted over at fidelity.com. It's an Economics 101 lesson entitled "Inflation: A threat or not?". For the most part, it's written in plain English... and I consider it worth reading. I thank Dr. Scott Diering for bringing it to my attention yesterday... and the link is here.

Arbitrary government power is being multiplied daily by the now practically unchallenged assumption that wherever there is any problem of any kind to be solved, government is the agency to step in and solve it. - Henry Hazlitt

Today's 'blast from the past' is an old chestnut from over 20 years ago. I can't remember if I've used this one before or not... but if I have, what the heck... once more won't hurt. Turn up your speakers and click here.

I see, from Casey Research's own Bud Conrad, that the U.S. Treasury department is going to print another $197 billion out of thin air next week as they do another series of Treasury auctions. I seem to remember them doing $235 billion worth during the last week in July as well. It will be interesting to see how well they can keep gold under control next week.

The gold price, in the week just past, has not quite recovered all of its losses from its high on Friday, August 14th. Since then, the U.S. dollar has fallen about 75 basis points... so we've had a devaluation of the dollar without a corresponding increasing in the gold price. I wonder if they have the same plan for the last week of August as well. Time will tell, but nothing would surprise me.

Yesterday I mentioned that it might be a good idea to subscribe to Casey's Gold & Resource Report. That recommendation still stands... as all the major gold and silver producers that CR keeps close tabs on, are included in that report. But the best of what Casey Research has to offer is to be found in its flagship publication...Casey's International Speculator. It's one of the longest-running, most respected newsletter services of its kind anywhere. For over a quarter of a century, I.S. has been dedicated to presenting speculative opportunities to investors looking to diversify into small-cap international firms… including junior U.S. and Canadian gold and silver exploration companies. These small, well-managed firms offer the very real potential to double or even triple [or better] in a short period of time. I urge you to give it serious consideration. If you subscribe today, you save 28% off the regular retail price of $249/year... plus it comes with a 3-month, 100% money-back guarantee! How can you lose? The link is here.

As I mentioned yesterday, I'm not expecting any big surprises out of the gold or silver market for the rest of the month. And despite all the wall-to-wall bad news out there, "da boyz" have done a pretty good job of keeping the lid on the precious metals so far... and I see no reason why that should change until after Labour Day. Then all bets will be off.

Enjoy the rest of your weekend... and I'll see you right here on Tuesday morning.