Gold backwardation? This is not 2008 It’s 2011 and actually worse

When my brother was around 8 and I was ten, my brother got a "Hugo Man of a Thousand Faces" set complete with all kinds of disguises and a fake hair patch. My father would fool around with us, and being bald, would use the Hugo hair patch as sort of toupee that didn’t quite work. It’s a great and fun memory of what I view as simple and better times.

Nowadays there’s another Hugo lurking around. Yes, that guy from South America. He wants his gold back — rather he wants to nationalize the Venezuelan gold industry. On the hook to deliver actual gold is the JP Morgue. No doubt JP Morgue has pledged the gold a hundred ways to Sunday and may find it difficult to make delivery. The Bank of England is also reported to be scrambling to make delivery. The metals markets are tied up in a knot over roughly 90 to 100 tons of gold that needs to be delivered. That it, just 90 to 100 tons. The US supposedly holds 9000 tons of its own gold. Talk about craziness. A pallet or two of the glittering gold stuff should already be in Hugo’s office, but as usual something that should be simple, is not that simple. Hugo missed the memo that said this game is not about taking delivery of gold, but letting us (JP Morgue, Bank of England et al) hold it safely for you. lol. This is why YOU should take physical deliver of your metals.

What ends up happening? A real short squeeze in the gold market. A market that is making minced meat out of the $1800 handle, having briefly already touched $1881 (active December contract). To add insult to industry, within the gold futures chain there has been a tiny bit of backwardation in a few of the further out contracts and between spot and the rest of the chain has narrowed. This is unprecedented and all the more reason why we are see a big squeeze in gold.

I wasn’t rambling the other day when I speculated that given present momentum we could see $2000 gold in a matter of a few weeks.

I have mixed emotions about these huge moves. This type of stuff is sure to spur more margin hikes in the futures market. The hike we saw last week has been completely ineffective. But more hikes will slowly have an impact. The rapid rise also leads to a further overbought situation which could lead to some downside vulnerability. However, it’s not all about short covering, or what the charts say. The world is flocking to gold as an investment haven. The world is seeing gold for what it is: a currency. Those are strong fundamental reasons to at least not take big bearish positions in the paper gold market.

The Market of Stocks

The pain remains. Yesterday was a 99% down day. That can mean upside follow through, though early S&P 500 indications are signaling the opposite. I am still of the mind and in the camp that there needs to be more pain in this market before QE3 can be well justified in the minds of the Fed wonks. See earlier comments about the lows of last year. While I see no justification at all for QE3, how can it be trotted out withe market not even below the lows of last year. Remember we are at 1163 before todays open. The S&P 500 sank to the 1010 area before last year’s QE came along.

To further muddy the waterstoday is an option expiration Friday. A downward move of another 2% might trigger further BIG selling if I am reading the OEX options tea leave correctly. It will take more firepower to trigger buy programs.

I have been short in names like Goldman Sachs, Bank of America, Deutsche Bank. I am in the green and will jettison those positions or do some partial sells toward the end of the day to wait and see what Monday will bring. But I am prepared to hold through the weekend. Yesterday the XLF puts were bought in huge size, perhaps signaling further rough times for the bank stocks.

Europe bank funding worries remain. There’s also the outside chance of some sort of emergency Fed meeting, but don’t bet the farm on tat one.

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