Gold Open Interest Far Above Previous All-Time High - A Bearish Sign?

As the hate-mail has continued to pour into this writer’s inbox, my position of selling out of the precious metal stocks that I purchased in late fall 2008 continues to be psychologically fortified.  After all, as I have said many times previously, I am as contrarian as I can be - the more hate mail I get (not that I’m a glutton for punishment or anything!), the more confident I am.

Loneliness, it seems, can be a wonderful thing at times.  In terms of finance it can be the best of things.

It is the state in which I find myself now - alone (or far enough between the few on my side that I might as well be) in my bearish calls on the precious metals.

I know that changing a gold bug’s mind is about as likely as Mr. Obama having a personal free-market Renaissance, but I still feel it is my duty to try - the only wish I have at this point of the game is to save folks from making the mistake of trading something that is going to go UP in value for something that is going to go DOWN in value.  This is not the type of decision that makes the least bit of prudential sense, and yet, the number of those making it grows greater and greater daily.

But don’t just take my word for it:

Gold Open Interest is far above the previous all-time high in March 2008.  the additional 50,000 open contracts is 500,000 ounces of gold, or  $525,000,000.00 of additional exposure to the gold market.  This is of course not including gold stocks, which have extremely low short ratios (the amount of shares short versus total shares available to trade).

A few examples, you say?  I though you’d never ask!

Barrick Gold (ABX) - Despite having such crummy management of their hedge book (the $3.6 Billion in diluted new-share issues is most certainly not enough to cover the hedge book at this gold price), the short interest is at only 1.3%! Meanwhile, 66,000 Call options contracts this month versus 31,000 Put Options should tell you the story - while the overall market is at 120% calls compared to puts, the most mismanaged major gold producer is at 213% calls to puts.  Sentiment is at major extremes toward all things shiny.

Anglogold (AU) - Options for November expiry are at 10,000 Calls vs. 6,000 Puts - a 166% rate.  Over 35% higher than the market average.  Anglogold is trading at almost 5 times its book value, after having negative operating cashflow in the last quarter, and has only 1% short interest.  Again, extremely overdrawn sentiment driven entirely by hope for a massive continued run-up in gold’s recent superman-esque run.

Current price inclinations on gold are the result of speculation only and are not fueled by real market fundamentals - credit levels have contracted in the US relative to the levels at the previous high in gold set in March 2008, debunking the Hyperinflationists philosophy.  The US dollar is not nearly at its low point of March 08, whereas gold is at a higher high almost inverse to the comparative difference in the USD from its previous Index price.  See here:

A major non-confirmation in what so many people see as the unflinching connection - that as the USD drops in value, gold goes up - shows us that the last legs of this rally have been driven by sentiment only and have no reflection of real fundamental aspects.

The “flee dollars” panic is so strong, and the “gold to $5,000″ crowd getting so big, that any day now we could witness a drastic and sharp reversal that could wipe out these new record prices in gold in one or two trading days.

In the end, most glitter-loyal gold bugs, I recommend selling those mining stocks and closing out any open futures contracts on the shiny metals you might be exposed to.  Gold is about to get a heck of a lot cheaper.

For this, you should be celebrating.  Since your loyalty is undying no matter the economic environment, the opportunity to buy so much more precious metals with those worthless FRN’s (Federal Reserve Notes, for those non goldbug-ese speaking readers) should be an occasion for joy and laughter.  Throw pride and unfounded claims to the wind for a moment and seize what may well become the last good buying opportunity for gold and silver as the final corrective wave of this depression takes them down to levels we can really call “cheap”.

Our recommendations have not changed, meanwhile, for the broader markets - consider this lengthened (and fast waning) rally in the broad markets as a generous gift from Mr. Market.  You have the opportunity to cash out 50% richer than you were last March, and avoid the massive losses that those who are chasing “break even” are soon to incur.  Hold cash or the safest short-term equivalents and be ready to pounce on a highly depressed and pessimistic market in virtually every asset class under the sun.

For the more aggressive investor and trader, now is the time to set up fantastic short opportunities in the broad market and the weakest/most overvalued companies.

As always, be careful out there and watch yourself!

Full Disclosure:  While I own precious metals from years of accumulation, and generally favor silver much more than gold, I have not purchased any physical metals for almost 12 months, and do not plan to until a major correction in dollar terms (est. <$8/oz for silver) has occurred.  I own LEAPS on almost all of the major US banks, several commercial real estate companies, and Barrick Gold.  I also have transferred over 50% of my portfolio in cash form into short-term US treasury bills.

Remember, Investophoria.com is the opinions and trading activity of the author only.  Any investment decisions you make are your sole responsibility.

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