"Run for your gold: There is not enough for all" - Wealth Managers

Huge physical demand amid pervasive bearishness might be setting up a massive short squeeze

Investors should be aware of a couple of key phenomena in the futures market that are affecting the gold price today and in the near future: short squeeze and backwardation.

Monday's huge rally in gold was partly driven by short covering. That means that speculators who are betting against -- or shorting -- rising gold prices on the futures market have to buy futures contracts when the price rises against their prediction.

With gold shorts near record all-time highs, if the metal continues moving higher, the rising price could possible trigger the mother of all short squeezes. "Major short squeezes are the stuff of market legends," says Adam Hamilton of Zeal Research.
According to UBS, "with gold sentiment quite negative and shorts at extreme levels, upside price risks cannot be ignored especially amid evidence of consistent physical demand. Historical seasonal patterns suggest that this is likely to strengthen later in the quarter, which in turn could prompt a short-term squeeze."

Hamilton agrees: "The bottom line is the record short position futures speculators have amassed in gold is wildly bullish for the yellow metal. These guys have a long track record of betting completely wrong at major gold lows, extrapolating major downtrends continuing indefinitely even when they've begun reversing. This grave error leads to forced buying as the rallying gold price forces the shorts to cover their hyper-bearish bets.

"And given such extreme spec gold shorts, widespread despair, and gold recently hitting the most oversold levels by far of its secular bull, it is due for a monster upleg. As this accelerates, the leveraged shorts will be forced to buy back the gold they owe at increasing rates. This will feed on itself and likely ignite a buying panic. It will very likely lead to the biggest and fastest upleg of gold's entire secular bull."
Dave Kranzler of The Golden Truth blog even sees a return to record price levels in the picture: "The combination of a severe shortage of physical gold available for delivery in Europe and Asia and the massive short position in Comex futures could well fuel a short squeeze in gold that would quickly send gold up and over the previous record price level of $1900."
Backwardation is another key concept in today's gold market. "Gold went into backwardation in comparison to the three-month futures contract in early January, meaning the spot price rose above the short-dated future contact," Reuters reported. This phenomenon suggests that "demand for physical delivery of the metal is now far outweighing supply."

"The physical market has tightened up substantially, a postulation that is corroborated by the growing premiums being paid ... and the ongoing wholesale delays in the delivery of substantial bullion tonnage," wrote Ned Naylor-Leyland of Cheviot Asset Management in a report this month. "What is happening now is that the absolutely inevitable 'run' on the 100:1 leveraged bullion banking system is truly under way."

"More and more people want their gold today, at a higher price, no matter that they can buy a future much cheaper," said Guillermo Barba, economist at the New Austrian School of Economics in Mexico. "The actual message of the backwardation is that there is behind the curtains a lack of confidence in the fiat monetary system, a de facto rejection of paper money by some people who prefer the real money. ... That's why a fall or rise in gold prices is not so relevant anymore. The monetary 'fire alarm' message, courtesy of the relationship between spot and futures prices, is: run for your gold; there is not enough for all."
Kranzler concurred: "The physical market is starting to overwhelm the paper market. The premiums reflect scarcity and greater awareness of the fractional nature of the paper market. This awareness is debasing the trust in paper currencies.  Possession of physical gold (and silver) is now being valued more highly than possession of paper dollars. This is reflected in the premiums being paid all over the world for 400 oz. gold bullion bars. Wealthy entities, central banks and sovereigns are will to pay a lot more in paper currency for an ounce of gold than is being reflected by the "spot" price of physical gold (as set by the paper market)."

Where is the demand coming from? The Far East, of course, specifically China. "Physical gold delivered to buyers by China's largest bullion bourse in the first half of this year almost matched the entire amount taken from its vaults in 2012, and was more than double the country's annual production," Bloomberg reported.

Because of this demand, gold leasing rates are rising: "The cost of borrowing gold has risen to the highest since the post-Lehman Brothers scramble for supplies, as the bullion market adjusts to a new era in which western investor demand is less dominant," London's Financial Times reported.

"In London gold forward rates (GOFO) continue to be negative, which means that the market will pay you more interest on your gold than on your dollars," Alistair Macleodnoted. "GOFO is telling us that strong demand for physical from Asia has cleaned out the London market."

Get your physical gold now before your local dealer is cleaned out. Don't wait around for a potential price explosion to act. Buy low, sell high. Don't be standing in line for wildly expensive gold with every Tom, Dick, and Harry who forgot about precious metals to chase the bubblicious stock market instead. Get prepared now, just in case. China might know something that we don't.

More information can be found online at http://www.goldbullionadvisors.com