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Possible Bottom In Gold And Silver?

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The downtrend in the precious metals sector that began in August has been punctuated with one of the most aggressive, blatant price manipulation efforts over the last month that I have witnessed in 20 years. While no one can prove it without access to the inside books at the Comex, I believe the price attack over the last 10-14 days was aimed at “encouraging” longs to either dump their April gold contracts or roll them out to June. Most of the price decline over this period – in fact over the last six months – occurred only after India and China and the rest of the eastern hemisphere physical buyers had closed shop for the day, leaving only the paper gold traders to play in the unsupervised silver and gold paper sandbox.

The motive is to disincentivize Comex paper gold longs from standing for delivery as well as attempt to scare off the growing “army” of retail investors who have been buying an enormous amount of silver products at the retail level. I believe the bank vaults are highly stressed right now to make deliveries to the east. The price smash over the last week took the April gold open interest from over 100k contracts late last week to just 27k by Wednesday’s Comex close (First Notice Day for April gold). In all likelihood, if all 27k were to stand for delivery that amount is far more manageable than 50k or 100k.

I also believe there’s a real problem with physical supply, which is why the various sovereign mints (U.S., Canada, England and Australia) have sharply reduced the amount of gold and silver products they will produce until further notice. I am highly confident this was done to make more metal available for banks to deliver into large eastern buyers. India’s buying based on the import numbers I see daily have shown the largest and most consistent buying on a daily basis that I’ve ever seen in February and March, when India usually takes a break from its winter/festival/wedding buying.

Add Russia to the mix of large eastern buyers that require delivery of the gold it purchases. It was announced on March 27th that Russia’s Finance Ministry has allowed the National Wealth Fund to diversify its assets by investing part of the funds into gold and silver. The ministry also stated that the share of gold has been significantly boosted in Russia’s foreign currency reserves. Per an announcement in January that Russia was continuing to unload its U.S. Treasury holdings, it means Russia is dumping dollars and buying physical gold and silver.

I’m always loathe to call market bottoms and issue upside price targets. But the Hulbert Gold Newsletter Sentiment Index hit negative 45% (newsletters that make buy/hold/sell recommendations on gold and mining stocks are 45% net short}. This is the lowest reading since early July 2013. Mid-2013 was the culmination of the greatest price attack on gold in modern history (post 2000).

The HGNSI is a highly reliable contrarian indicator but it does not offer guidance on the timing of a bottom. This bearish environment could persist for several weeks or it may have begun to turn Wednesday and today (4/1/2021). Also, for what it’s worth, the Wells Fargo gold analyst on Monday put out a report in which he said the supply/demand situation could fuel a strong price rally in gold and he set a target of $2,200. Wells is not a significant player on the Comex. For now I’m not yet re-allocating the cash I raised over the last month but I may start to slowly “wade back into the water” over the next several days.

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The next big move in financial assets will come from the mining stocks.  Mining stocks offer  potential wealth enhancement through exposure to the “optionality” upside of price gold and silver prices.  If you would like some ideas for investing in mining stocks, take a look at my  Mining Stock Journal.

The names that I updated and provided an buy/hold/sell opinion on in the past issue (April 1st) include: US Gold, Paramount Gold, GR Silver, Wallbridge Mining, Northern Vertex, Precipitate Gold, Millrock Resources, Cabral Gold, Amex Exploration, Brixton Metals and Great Bear Resources; I also offered some call option ideas on large-cap miners like New Gold and First Majestic; and I provided a brief opinion on Palladium One and Silver Dollar Resources.

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