Once again, a research study by analyst Adrian Douglas has shed a new light on the state of the gold and silver markets.
His January 15 report, titled “Strong Indications of Gold & Silver Shortages” can be read at https://marketforceanalysis.com/article/latest_article_011511.html.
For both the gold and silver markets, Adrian has tabulated the last ten years of closing information from the COMEX. He created graphs plotting the closing spot price on one axis and the number of open interest contracts on the other axis.
The results are shocking. At the lowest prices, which occurred close to ten years ago, changes in the open interest show virtually no difference in the gold or silver spot prices. However, as time progressed, the clusters of spot prices tilt. That means that as the open interest increased, the prices of gold or silver started to rise.
As the graphs get closer to the current day, the correlation between spot price and open interest becomes a horizontal or even negative slope. For instance, ever since the price of silver reached $22 per ounce last fall, further price increases generally correlate with fewer open contracts on the COMEX.
The clearest implication of the silver chart is that once silver surpassed $22 per ounce, the COMEX traders on the short side of the contracts became more aggressive at closing their short positions and less willing to commit to sell new contracts. As the price of silver rose further, this trend became even more pronounced.
In the gold market, the open interest stopped increasing once the price topped $1,300.
These charts show clearly that recently, as gold and silver prices rise, demand is increasing while supplies are diminishing. This was not true ten years ago where higher prices brought out more supplies.
This analysis only shows the impact of trading on the COMEX markets. It does not reflect activity in the London market nor the effect of trading gold and silver paper contracts and derivatives. The paper markets trade in far higher volumes than the physical market. Ultimately, however, the paper markets must react to physical market supply shortages and surpluses. If the major banks that are shorting the COMEX gold and silver markets are now closing out such positions, this is happening because these businesses anticipate higher prices in the future.
While there may be lots of reports in the mainstream media of so-called experts proclaiming that the prices of gold and silver are at their peak or in a bubble, I think more accurate information can be discerned by watching the actions of professional traders who are putting billions of dollars on the line with their trading decisions. As the last ten years of COMEX gold and silver prices and open interest indicate, supplies are getting much tighter and prices are due to go much higher.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.