Gold Potential for Massive Short Squeeze on Large Hedgers

By: Mark_OByrne

Gold was up $4.60  to $923.60 per ounce in trading in New York on Friday and silver was up 33 cents to $17.49 per ounce. Gold traded sideways in Asia and early trading in Europe and is trading at $921.80. Silver has also fallen marginally and is down to $17.60 per ounce.

Gold also rose in the other major currencies and rose to new near record highs in euros and sterling. The London AM Fix at 1030 GMT this morning was at $920.25 9 25.50 (up from $908.25). Gold fixed at £472.60 (down from £474.37) and €634.04 (down from €635.91).

Platinum hit a new nominal record high at $1969.50 overnight and silver hit a new 27 year high at $17.60. Silver is looking particularly strong and will likely soon play catch up with the platinum group metals and $20 silver looks increasingly likely in the coming weeks. As the $100 oil mark was reached so to traders will be looking to the round figures of $2,000 on platinum and $1,000 per ounce in gold.

With the credit crisis deepening gold will be well supported on any pullbacks and will likely continue to surprise to the upside. There is also a potential for a massive short squeeze with large hedgers and those who have lost billions in being massively short this market in recent weeks being forced to buy back their positions leading to a huge buying panic and a surge in prices that would far surpass that seen in the wheat and platinum markets in recent days.

The FT reports that American International Group “sent tremors through the markets on Monday when the insurance company raised its estimate of losses in October and November from insuring mortgage-related instruments from about $1bn to nearly $5bn. The announcement came as a number of companies are preparing to release audited accounts for 2007. Auditors have been trying to encourage a common approach to valuation, amid predictions that this will shed new and harsh light on the full scale of the financial damage caused by the subprime crisis.”

The world's largest insurer saw $14 billion wiped off its market value in one day and was down by 11.72% on the day.

The LEX Column in the FT reports that “as the Group of Seven finance leaders said over the weekend, there could be $400bn of losses in the financial system linked to US subprime mortgages.

Yet only $120bn have been revealed so far. American International Group's confession on Monday reveals where some more of the losses were hiding. In December, the US insurer announced a $1.05bn to $1.15bn charge for October and November for credit default swap (CDS) insurance it wrote against collateralised debt obligations backed by subprime mortgages.” Now the charge is up to $4.9 billion.

Nearly all analysts and governments have consistently underestimated the extent of the losses to be endured and unfortunately the reality is likely to be multiples' of these initial estimates. This was the case in Japan in the 1990's. About $500 billion of adjustable-rate mortgages (ARMs) will reset to higher mortgage rates in 2008 reeking further havoc on the US housing sector which will likely hit the US consumer and economy very harshly. Not too mention major issues for all sorts of weird and wonderful “asset backed” this, that and the other and other 3 letter acronyms designed to confuse and delude and which will create even greater systemic issues in the coming months.

IMF Gold Sales
Over the last two days gold has greeted the weekend comments regarding the possibility of IMF gold sales with disdain. Unsurprisingly this latest gold sale proposal failed to deter gold buyers. The Italian Economy Minister Tommaso Padoa-Schioppa, announced at the G7 meeting in Tokyo that the Group of Seven (G-7) approved the sale of gold by the International Monetary Fund (IMF) from April. The IMF has 3,217 tonnes of gold in reserves – the third largest holding in the world after the Federal Reserve and 8,133.5 tonnes of gold and the Bundebank's 3,427.8 tonnes of gold.

It is unlikely and implausible and is not the first of similar proposals that have gone nowhere. Even Gordon Brown mooted the possibility of IMF gold sales. Despite presiding over the sale of much of the UK's gold bullion reserves at record low prices. Which incidentally has left the UK in a more precarious position should there be a global systemic and monetary crisis.

As ever the proposal was very sketchy in detail. Particularly with regard to how the major obstacle of the majority voting rights of the U.S. in the IMF and the small matter of the U.S. congress having to vote on such a proposal would be overcome. In the past many US lawmakers have been very vocal in opposing IMF gold sales.

It reeks of desperation on the part of the G7 and is a further case of panicked irrational short term thinking designed to treat the symptoms of the present global financial and economic crisis rather than treat the root causes which are cheap money in the form of irresponsible monetary policies which has caused the creation of significant asset bubbles and humungous levels of debt at all levels of western society (particularly in the Anglo Saxon world).

It is especially ironic that in this era of unprecedented systemic and monetary risk that politicians of the G7 are so ignorant that they would sell the one asset which may protect the institutions and the citizens faced with this growing crisis.

Whereas any new IMF gold sales today would instead meet with a strong bid from anxious investors and private householders looking to defend their wealth. If it sells gold now, the IMF looks very unlikely to dent gold prices. Indeed, "every time the IMF has sold gold it has actually triggered more buying interest," says Mario Innecco, a broker at MF Global in London, to Bloomberg.  "It will just make it easier for the big sovereign buyers" – the big central banks outside the G7 who want to build up their gold reserves – "to snap up cheap gold from the IMF."

Selling gold is another short sighted illusory panacea which will create more problems for western financial institutions in the long term. Indeed it may ultimately lead to a further increase in the wealth and power of Asian and other emerging economies and diminution in that of western economies and particularly the U.S.

Support and Resistance
Support is now at $900. Strong support is at $850 to $860. There appears to be strong physical demand internationally for gold in the $890's.

Silver
Silver is trading at $17.49/59 at 1200GMT.

PGMs
Platinum continues to surge to new record highs and is trading at $1956/1966 (1230GMT).

Palladium is trading at $436/442 an ounce (1230GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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