The Hunt Brothers Mark two could be coming to a screen near you in the gold market…

The infamous Hunt Brothers

Do you remember the Hunt Brothers? Well, if not, you should read the February edition of SBM (page 8, link here – http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v13_generic) because a very similar situation could be just about to occur in the gold market…

In 1979, the Hunt Brothers became infamous as they attempted to corner the silver market by taking positions in futures contracts while buying up as much physical silver as they could. With both futures and the physical asset on their hands, the Hunt Brothers then tried to force delivery at the futures contract expiration for sellers of those contracts. Since they had accumulated some 100 million ounces of silver, futures sellers couldn’t easily honor their delivery and so had to pay for silver at inflated prices. From $11 per ounce, silver quickly rose to $50. Today, the modern equivalent in the gold markets to the Hunt Brothers is the goliath that is China. And they have somewhat deeper pockets…

As we have been repeating time and again in recent weeks in our blogs, it just doesn’t make any sense for gold prices to continue to retreat while good ol “Helicopter” Ben Bernanke continues to print and be damned, and additionally whilst demand for physical gold continues to hit new records. We speculated here – http://www.spreadbetmagazine.com/blog/an-interesting-post-laying-out-the-case-for-the-coming-gold.html that the market was due a squeeze, and as they say, with gold prices taking out its pre “taper caper” lows today at $1342/oz, it looks like the squeeze is on…

As the FEDs balance sheet expands nearly $4trillion this year, and they continue to pursue the now potentially destabilising ZIRP policy, the US dollar is likely to start its long term downtrend anew once more and gold will appreciate in price relative to a debasing currency. This is without the supply and demand dynamics that are moving back in its favour too. With the cost of production estimated near $1,287/oz and there likely to be a reduction in supply through 2014/15 given the difficulties many mines have found themselves in this last 12 months, as postulated here in this blog  – http://www.spreadbetmagazine.com/blog/can-you-deliver-my-gold.html, it seems there is a major disjoint between the COMEX futures market and the physical market. There are growing voices that someone is behind this discrepancy and that there is method to the madness…

Fortunately market manipulations can’t last forever and there are some early signs of exhaustion. Something which may lead to a price explosion in gold in the near future. JPM gold reserves are declining at a worrying pace. In a single day in the last several weeks, the bank saw 66% of its eligible gold withdrawn from its vault. Nearly 90,311 ounces we withdrawn, leaving the vault with just 46,000 ounces. What with the latest delivery notices coming from Comex, registered gold at JPM is at an all-time low o just 390,000 ounces while 2 years ago inventories amounted to more than 3 million ounces. This year alone, Comex and ETF gold inventories declined 750 tons, a worrying pace, and which reminds us of the 1979 Hunt Brothers cornering adventure. Someone is accumulating gold and forcing delivery. At some point, perhaps in the near future, that person/entity/country may just be able to demand whatever price they want for gold when the sellers of futures are called upon to deliver .

Coincidentally, Chinese demand for gold has been steadily increasing over the years. This year alone, the country imported a total of 1,500 tons of gold. With global production of the physical metal being only 1,300 tons YTD and with China not being the only buyer for gold, the excess demand must have been satisfied with reserves coming from somewhere. Can you guess from where?

We cannot say for sure that the 750 tons withdrawn from ETF’s and Comex reserves were sent to China, but everything seems to point East. Someone has been playing a dangerous game attempting to push gold prices lower but, with a new player of China’s size, we don’t know for how long prices will stay at $1,330. This plane is going to take reach escape velocity very soon in our opinion…

Richard Jennings, CFA. Fund Manager Titan Investment Partners.

If you’d like to position yourself to benefit from rising gold and precious metals prices then click the link below to find out about our Precious Metals Fund at Titan Investment Partners and which is now open for business.