Peak Oil and Gold Short Squeeze

By: Mike_Clark

Gold
Gold was up $7.30 to $791.70 in New York on Tuesday. Then, gold sold off initially on the FOMC's 0.25% interest rate cut but then turned around and rallied to new record highs at $798.80. It has drifted lower in Asian and European trading and is trading at $792.50 at 1200 GMT. Gold has again rallied in other major currencies and is trading at £381.50 GBP (up from £379.16) and €549.46 EUR (up from €543.86) and remains near record nominal highs in terms of GBP and EUR respectively.

The action in the gold market remains bullish with gold rallying in all major currencies. A new record monthly close is very important from a technical point of view and shows that this is not some short term speculative blow off in the dollar gold price as in 1980. Psychological resistance is at $800 while support is at the 10 day moving average at $772 and at $750.

There are now huge long and huge short positions in the gold market and there is a classic Mexican stand-off taking place. If the shorts win, which they have tended to do in recent years, the gold price could sell off sharply and retreat to lower levels. However, given the present macroeconomic environment with fears regarding record oil prices and increasing inflation, an increasingly likely serious U.S. recession and a possible sharp devaluation in the U.S. dollar, a massive short squeeze is looking increasingly likely.

A short squeeze is when the price of the stock, commodity, currency or traded asset rises and investors who have previously sold short rush to buy it to cover their short position and cut their losses. As the price of the market, in this case gold, increases, more short sellers feel compelled to cover their positions. The commercial shorts have lost billions on their gold short positions in the last two months and they are being served their heads on a plate. A massive and unprecedented short squeeze looks increasingly likely and this could propel gold above $1,000 per ounce in short order.

Forex and Gold
As expected the Fed cut rates 0.25% to 4.50% pushing the dollar to hit new record lows against many currencies. The dollar fell against the EUR and GBP (below $1.45 and $2.08 respectively). The strongest gainers were the Brazilian real, the South African rand and the Australian dollar.

In its policy statement the Fed stated that it now sees upside risks to inflation roughly balancing downside risks to growth, hinting that rates may now remain on hold for a while. The dollar needs strong U.S. economic data in the coming days to provide support. Manufacturing ISM, pending home sales, weekly jobless numbers, the core PCE inflation indicator and car sales figures will be important today. Oil prices, which surged overnight, will also be closely watched (more below).

The U.S. Dollar Index fell to a new record low overnight at 76.465 which is providing strong support for gold.

Silver
Spot silver was trading at $14.34/14.36 (1130 GMT).
Silver remains probably the most undervalued of all the commodities and is less than 29% of its 1980 nominal high of $50 per ounce. Silver will likely outperform most commodities in the coming years as investment guru, Jim Rogers, pointed out recently.

Interesting data from the Chinese central bank regarding silver shows that September YTD Chinese Imports of Silver were 586,972 kilograms, taking the nine-month YTD total to more than 4 million tons, with a year over year growth rate of almost +65%. Additionally, in the first nine-months of this year China was a net importer of silver, bringing in 600,000 tons more than they exported, a huge 1.3 million kilogram swing from last year's 9-month YTD net export total of 750.000 kilograms.

PGMs
Platinum was trading at $1447/1451 (1130 GMT).
Spot palladium was trading at $371/376 an ounce (1130 GMT).

Oil
Oil surged $4.15 per barrel to $94.53 yesterday and hit a new high of more than $96 a barrel this morning, driven by renewed fears of fuel shortages this winter and the impact of rising demand from China and India. The price of a barrel of U.S. crude oil for December delivery reached $96.24 in Asian trading, having already gained 5% yesterday on the New York exchange. Brent North Sea crude also hit a new high of $91.63 a barrel.

There is no technical resistance to $100 and we will likely reach $100 in the coming days. Traders believe that even $125 per barrel is now highly possible. Bloomberg reports that Oil traders increased bets that December futures will reach $125 a barrel because of possible disruptions to Middle East supplies and rising demand. Traders held call options to buy 2,526 contracts, each representing the right to buy 1,000 barrels, of December oil at $125 in New York as of Oct. 29, from 1 lot on June 29, New York Mercantile Exchange data show. Bets on $100 oil are also surging: Traders held options to buy 49.7 million barrels of December oil at that price on Oct. 30, up from 30 million barrels on Jan. 2.

Peak oil, the view that supply has reached, or will soon reach a high point and then fall, is looking increasingly likely.

Leading figures from the Middle East oil industry added their voices on Tuesday to those warning that the world is struggling to sustain rising oil production."There is a real problem - that supply may not be possible to increase beyond a certain level, say around 100 million barrels," Libya's National Oil Corporation chairman Shokri Ghanem said at an industry conference. "The reason is, in some countries production is going down and we are not discovering any more of those huge oil wells that we used to discover in the Sixties or the Fifties."Sadad al-Husseini was a key architect of Saudi Arabian energy production policy for more than a decade whilst a top official at state oil firm Saudi Aramco. He was even more pessimistic, saying world oil production had already plateaued. "We are already three years into level production," Husseini also told the annual Oil & Money conference, a gathering of top executives.

The views are far more conservative than those of the International Energy Agency, adviser to consumer countries, that supply will rise to 116 million bpd by 2030 to meet demand, from about 86 million bpd now. Production is in decline in some regions, such as the North Sea, increasing the burden on other producers such as the 12 members of the Organization of the Petroleum Exporting Countries.

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