Money's Not Worth The Paper It's Printed On

All in all, it was pretty quiet in Far East and London trading on Friday...and the gold price was basically unchanged when trading in New York began at 8:20 a.m. Eastern time. Gold got sold off about seven bucks from that point...but minutes before 9:30 a.m...a fairly impressive rally began that lasted until a few minutes after noon. During that time period, the gold price tacked on a bit over $35 before the buyer disappeared. From Friday's high of $1,348.30 spot, the gold price gave up a bit going into the close of trading at 5:15 p.m. Eastern time.

After expecting the worst, I was delighted with yesterday's pleasant turn of events. Who the buyer might have been when the gold price is below the 50-day moving average, is open to debate...but Ted Butler didn't think it would be tech funds. They don't normally become buyers until after that moving average has been broken to the upside. I suspect that it was the New York bullion banks covering short positions...causing the price to rise. More on that in the discussion around the Commitment of Traders report.

After getting the hell kicked out of it in early Far East trading on Friday morning...silver recovered most of its losses by the New York open. And, just like gold, silver got sold off a bit, before blasting skywards minutes before 9:30 a.m. Eastern. Over 95% of silver's gains were in by lunchtime...and silver basically traded sideways for the rest of the day. The high tick of the day was $28.07 spot. Once again, I suspect bullion bank short covering as the cause of that price rally.

On the day, gold was up 1.79%...silver was up 4.05%...platinum 0.45%...and palladium 1.24%

Like the gold and silver prices...the world's reserve currency didn't do a whole heck of a lot between the Far East open and its 7:30 a.m. low in New York. From that low, the dollar began to rally...and by 1:40 p.m. the buck was up a bit over 60 basis points...before sliding slightly into the close of trading.

It's been a while since we've seen the dollar and the precious metals rally together. Of course the dollar spent most of January falling, while gold and silver prices were crashing...so why should we be surprised when the opposite sort of counterintuitive dollar/gold price action occurs?

With gold down five bucks when the equity markets opened in New York at 9:30 a.m. yesterday morning, it was no surprise to see the gold stocks open slightly in the red. But once the gold and silver rally developed some legs...the precious metal shares were only too happy to join in. The HUI was up over 3% at one point...but could not hold those gains...and closed up only 1.17% when all was said and done. Here's the 5-day chart for the week that was. It's possible that we saw the bottom [for this move down] on Tuesday? We should find out that answer to that next week.

And with silver up over a buck...most of the silver stocks were up many multiples of the HUI's gain on the day.

The last CME Delivery report for January was posted at their website early yesterday evening...and showed that 11 gold and 48 silver contracts were posted for delivery on Monday, January 31st. For January, not a traditional delivery month for either metal...717 gold and 819 silver contracts were delivered. The gold number isn't a lot, but the silver number is pretty chunky. Five years ago, a non-delivery month for silver might have shown a handful of contracts delivered...now they're significant amounts. In January...4.1 million ounces were delivered.

Shortly after they posted the last day of delivery for January, they posted the First Day Notice for February. With February being a big delivery month for gold, the numbers are impressive, as 6,895 gold and 111 silver contracts were posted for delivery on Tuesday, February 1st.

The big issuer in gold was the proprietary trading [house] account at Deutsche Bank...with 6,459 contracts delivered. The Bank of Nova Scotia was a very distant second at 432 contracts. There was an impressive list of stoppers [receivers]...with the biggest being HSBC, Bank of Nova Scotia...and JPMorgan, in that order.

The big issuer in silver was the Bank of Nova Scotia, with the biggest stopper being Triland USA.

The First Day delivery report is well worth spending some time on...and the link is here.

The GLD ETF showed another decline yesterday. This time it was 78,063 ounces. There were no reported changes over at SLV.

For whatever reason, Switzerland's Zürcher Kantonalbank did not update their website for the week ending January 21st until yesterday. For the prior week, their gold ETF was up a smallish 3,244 troy ounces...and their silver ETF showed a decline of 38,163 ounces. I thank Carl Loeb for these numbers.

And, for the fifth day in a row, there was no report from the U.S. Mint.

There was almost no movement at any of the Comex-approved depositories, either...and if you want to see what I mean by that...click here.

The Commitment of Traders report was very positive, but not as impressive as either Ted Butler or I were expecting/hoping. In silver, the Commercial net short position decreased by a smallish 2,222 contracts...11.1 million ounces. This is not a lot, considering the price action during the reporting period. The Commercial net short position is now down to 215.7 million ounces. The '4 or less' bullion banks are short 201.0 million ounces...and the '8 or less' bullion banks are short 253.0 million ounces.

In gold, the bullion banks decreased their net short position by 8,988 contracts...or 898,800 ounces of gold. The Commercial net short position is now below 20 million ounces for the first time in years...at 19.7 million ounces. The '4 or less' bullion banks are short 16.8 million ounces of gold...and the '8 or less' bullion banks are short 22.6 million ounces of the stuff.

Ted made the comment on the phone yesterday that maybe one of the reason why the COT was such a disappointment, was because the continued price bashing by the bullion banks is not having the same desired effect...as most of the technical fund longs have already bailed out...and further pounding gets less liquidation, as the law of diminishing returns sets in.

Ted Butler's "Days of World Production to Cover Short Positions" graph is updated with the latest COT data...all of which is courtesy of Nick Laird over at sharelynx.com.

While I was at the resource conference in Vancouver, I received an e-mail from reader Lou Horner. In it, he said..."Hi Ed, please show the chart with the largest short COT positions from one of your old columns, so we can see the progress as compared to the current one. Thanks, Lou."

I thought that was a hell of an idea, as the weekly changes don't show a lot...and now that I'm back on my own computer...here's the "Days of World Production to Cover Short Positions" chart from back on September 28, 2010. Even a cursory glance at them reveals just how much the '4 or less' and '8 or less' bullion banks have covered in all four metals...especially in silver.

As a 'for instance'...in silver, the '8 or less' bullion banks were short 177 days of world silver production in the COT for positions held at the close of trading on September 28th. The latest COT report above [for positions held as of January 25, 2011...shows that the '8 or less' traders are down to only 130 days of world silver production held short. This is still a grotesque and obscene number...as they are now only about four months of world silver production held short, instead of six months! I'm underwhelmed.

But the other thing it highlights, is just how much short covering is left to go. And every time they go into the open market to buy longs to cover their short positions, they leave their calling card...much like they did on Wednesday...and again on Friday, when their buying drove up the prices of both metals.

So, the bullion banks are covering shorts when they manufactured this January price decline...and then drive up the price when they cover shorts to the upside...and it's right on the gold and silver charts for all to see. But you have to know what they're doing, how they're doing it...and where to look.

This isn't rocket science.

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¤ The Wrap