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What's Going On With Gold? Massive OTC Options Position?

What's Going On With Gold? Massive OTC Options Position?

Getting to the bottom the recent surge in the gold price

Before we start, have you noticed Condor Gold (CNR.L/COG.TO) is really starting to move, since we covered it? That call is working out well. Fingers crossed. Take a look if you haven’t already.

I wanted to take a look at the gold price today. As I'm sure you are aware, it has been extraordinarily strong in recent weeks.

$2,100/oz, or just below, was resistance for four long years. Each attempt - and there were at least three - to get through that level stuttered and stalled. Then, last month, after a false break late last year, we finally broke out. Gold has not looked back, suddenly putting on over $200 and behaving like something out of the spivvier end of the cryptocurrency markets.

When an asset breaks out to new highs, there is no resistance overhead. Just blue sky, as they say. The price will often shoot up higher and quicker than expected before the run eventually starts to fizzle out. It will often then retrace to the break-out point, kiss it goodbye, and off we go.

So I don't think there is anything particularly abnormal about what gold is doing at the moment. We are in the shooting-up higher and quicker than expected phase of the cycle. Typically, it will at some point fizzle out, and we'll return to the break-out point and kiss it goodbye.

Here's an illustration of what I mean:

It goes without saying that this is a possible - in my view likely - scenario, but price action in real life is always a lot messier than idealised predictions.

At least, I didn’t think that the price action was particularly abnormal until I spoke to my mate Ross Norman of Metals Daily yesterday. We had a long chat, and he is very concerned about what is going on. He thinks something big is afoot. I have to say, when it comes to gold price action, I bow to Ross. He has been at the coalface all his life. Current prices are a long way from traditional buyers, he says.

If you are interested in buying gold, check out my recent report. I have a feeling good is going to come in very handy in the not-too-distant future. My recommended bullion dealer is the Pure Gold Company.

In the 1970s, the Hunt Brothers accumulated extraordinary amounts of silver so that by 1979 they had nearly cornered the market. The silver price famously rose from $11/oz in September 1979 to $50 in January 1980. It then collapsed all the way back to $11 and below. The Hunt brothers were charged with manipulating the market and eventually filed for bankruptcy.

Obviously, the gold market is many times bigger than silver was, but Ross thinks that this price action is not normal and that there is a huge - perhaps even Hunt-Brother-huge - options trade somewhere behind it. I’ve spoken to others at the LBMA and the World Gold Council and they think the same.


A normal gold market would have corrected after this week’s "strong inflation data prompted the dollar and 10-year Treasury yields to rally, casting strong doubts about a June Fed rate cut,” he told me. Gold ignored it.

The buying is not coming from physical demand in the West. That has "absolutely cratered." "US Mint sales of gold eagles in March 2024,” for example, “are down 96% year on year." ETFs have been seeing net outflows, especially with the listing of the bitcoin ETFs, and "shed 15% of their total holdings." Chinese demand is hot, but that is offset by weaker than usual Indian demand. "Flow of gold to Asia is currently 'good but not exceptional' ... and therefore not sufficient to propel gold to current levels." Global Central Bank purchases have also eased. In any case, central bank buying tends to be much more measured, unless a bank is buying in a hurry.

He discounts the idea that a sovereign state is behind the move, maybe a BRICs nation along the ongoing 'de-dollarization story'. "They tend to buy on the benchmark (or fix), and these purchases are not. For a move of this scale, we would have expected physical transfer amounting to several hundred tonnes - and there is no evidence of that." London physical gold holdings are actually up a little.

A lot of people are scratching their heads about this.

What about the options market? While there have been some large trades on the Chicago Mercantile Exchange with high strike prices, they are "not really sufficient to drive the market much higher." So that just leaves the murky world of Over-the-Counter (OTC) Markets, which "seems to have been corroborated today by the LBMA data. Someone has evidently made a monumental bet on the gold market via the OTC options market."

Golden bean counters at the LBMA are crunching the data, as I write, also trying to figure out what is going on. As this is the OTC market, we don't know "precise volumes, strike prices, or expiry dates ... all we know is it appears to be extremely significant in size. A well-known hedge fund did precisely this back in the early 2000s with enormous success." I'm hearing numbers as big as 50-100 million ounces. That would be 1,500 - 2,500 tonnes. China's entire official holdings, to put those figures in context, and many times the UK's. Huge, if true. If true…

Here's the thing, when those calls expire, the gold market, as Ross says, "will quickly discover gravity." We just don't know when.

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The Flying Frisby
The Flying Frisby - money, markets and more
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