Peter Schiff puts an interesting question in his latest podcast here in relation to the rout of Oil futures this week: could it happen in reverse with gold? The action of the oil market this week has been terrifying. Or at least it should be, as a barometer of what is to come in the holed economy purportedly as a result of Coronavirus, although I would argue the issue is more of a giant everything bubble that was waiting for a pin. Well, the pin duly arrived and our very own Peter Brailey has covered himself in glory, correctly predicting negative oil prices. So what is Peter Schiff’s point?
Firstly, I should say that Peter Schiff is a gold man. He called the 2008 banking crisis and his predictions of the collapse of the US dollar alongside rising gold were stymied by QE. Of course, now it appears that the QE largesse of the Federal Reserve is biting it on the bum as it is now clear it was no temporary measure (as predicted by Schiff) and QE1 was followed by QEs 2 and three (as predicted by Schiff) and even before the magic money tree was once again visited by current Fed chairman Buzz Lightyear (QE “to infinity and beyond”) in response to coronavirus, we had “not QE” last autumn as the Fed went about….er….QE. Needless to say, Peter Schiff is enjoying a spot of Schadenfreude at the moment! The negative oil prices seen recently occurred in the futures market. Storage is full, nobody is driving and Opec and Russia has been producing as fast as it can. The result was that as May expiry approached, suddenly those left long had a problem – they didn’t want the oil, had nowhere to store it and nobody else wanted it either. The result was that - at MINUS $40 a barrel - they had to pay someone else to take the oil away. And the problem is that there are more tankers on the way as global production still far exceeds demand.
Now turn that on its head with regard to gold. There is a supply shortage, physical prices of actual metal (as opposed to bits of paper) remain way ahead of the spot price (to underline this, as I write the spot price is $1691 but the price of a 2020 one ounce gold Eagle proof coin from the US Mint is $2375). The claim is that there is plenty of gold in London, but there aren’t any flights to take it over to New York. Now consider this: if you really wanted physical gold, you might not be prepared to pay the huge premiums of the US Mint and others. But there is a way forward – buying in the futures market. You might have to wait until June, but you can opt for physical delivery. Right now, June gold futures are $1711. That’s a sight cheaper than $2375!
Peter Schiff’s suggestion is that the gold market could easily sniff out a huge bear squeeze in the run up to June expiry. Anyone sitting short would be required to deliver gold that they probably don’t actually have. As expiry approaches, just as happened this week in the oil market, panic sets in – and the market will punish those shorts with a vengeance if this plays out. Indeed, I wonder now if this was the real reason for the gold futures market to run so far ahead of spot as the last round of futures expired: the shorts simply could not deliver. Was that just a dress rehearsal? I’m not quite sure how one would play this. As I mentioned the other day, I did shove a small (gambler’s) stake into the Wisdom Tree 3x gold leveraged fund (3GOL). As a long term investment it is surely a total bargepole, as I explained at the time, but the fund is run essentially by buying daily options in gold – and it looks like it is the futures market where it operates. So if push comes to shove as June expiry approaches, it should make an interesting one to watch! I’m not sure I could recommend it, but it is there. The other possibility is that gold producers may take advantage by hedging sales – but in any case, if this plays out then surely gold producers will rise in response. However, it does look like gold could well have a jolly good beer and popcorn moment coming up, whether you are a die-hard Austrian economist or a believer in the Central Bank magic money tree harvesting operation.
Filed under: gold, oil, Bidstack, Unilever, coronavirus, Avacta, Ariana Resources
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