Record Shorts (Updated)

Whoops! No not that kind.

Hedge funds are shorting gold in a massive bet that gold is going lower.

 From Zerohedge:

Well, they've finally done it.

As the following chart of the day from Bloomberg shows, as of this week, hedge funds have made "the biggest bet ever" against gold by taking Comex gold shorts to all time highs.

To their reflexive benefit, we will admit, they have managed to push the price of gold lower, not much... but it is lower (whether with the BIS' assistance or not is irrelevant). It is a different question if the price of gold is low enough to reflect such a record bearishness. But the biggest question is what happens if there is a catalyst to launch a covering rally: such as, hypothetically speaking of course, the People's Bank of China were to announce that it has in the past four years in which it provided no updates on its gold holdings (last is as of 2009), accumulated some 2000-4000 tonnes of gold.

Surely, that would be most unpleasant to all those record shorts, and the impact on the price would be most parabolic. Why, all those shorts better indeed pray there is no short squeeze now or any time in the future...

Typically this would be enough to lower gold by itself and would certainly benefit if a Western central bank, that had a strong interest in keeping the price of gold down, wanted to give it a little push. Only problem is, we are seeing massive buying of physical gold around the world.

So what does this mean? More volatility and the possibility gold take a large final dip/crash before it resumes climbing again when fundamentals take control.

If you already hold a large physical gold position you can hedge it by buying Put options. When you buy Puts, you make money on the underlying security when the price falls. A Put Option on the GLD could hedge your position.

On the other hand, if you've not bought any physical gold because the price has been falling, you may be about to get the chance of buying at a fantastic lower price. Because if the shorts win gold could drop another $100, but you can also be sure demand for the physical stuff will become even stronger.

You know China has to be loving this as Zerohedge suggests. Of course, if the hedgies are wrong, they'll be forced to cover their losses by BUYING GOLD which could very well send gold back up$100 or more.

Gold could make a huge move either way. Be prepared. The only guarantee here is much greater volatility.

UPDATE 5/23/13

James Turk provides his insight:

...But in London, the tightness cannot be distorted or hidden.  We can see the tightness by the shorts delaying delivery, which is happening right now.  So it is clear that the buyer or buyers who pushed the gold price up during the London PM fix yesterday were obviously desperate to get their hands on physical metal and were prepared to pay whatever price it took to obtain it.

The huge premiums over spot in Asia and the long delivery times in London clearly show that this take down in gold over the past few weeks was all about what was taking place in the paper market.  The same is true for silver, which looks like it had a selling climax on Monday, given the huge upside reversal in its price that day along with gold.  Gold's reversal wasn't as spectacular as silver, but nevertheless it was a solid performance.

There is an old saying that market prices can appear irrational longer than one can stay solvent.  It is one reason I do not recommend trading markets or using leverage, but instead focus on accumulating undervalued assets that are paid for in full.  For the past few weeks, and even now, the precious metals are being given away at bargain basement prices because traders of paper metal have forced the gold price lower by their relentless selling of gold's various derivative instruments.

The hedge funds in particular have been piling on and now have a record short position.  Maybe they foolishly believe that gold's 5,000-year history as money ends here.  The only thing about to end is the hedge fund short positions as the gold and silver prices look ready to blast off from current levels.  KWN readers should expect a major upside move that will panic these hedge funds out of their short positions.  In other words, the physical market is about to take down the paper traders who are massively overexposed on the short side.”