For the entire year of 2002 so far, Gold's trading range on a spot future closing basis has been 9.88% (low $US 278.40 - high $US 305.90). Since Gold made its latest foray above $US 300 by closing at $US 302.20 on March 27, Gold's trading range has been 2.38% (low $US 298.80 - high $US 305.90). Clearly what Gold is NOT is "volatile". In fact, if the "trading range" narrows much more, Gold may stop moving at all. If next week (April 22 - 26) is like the previous three weeks, then Gold will have been beating about the $US 300 bush for a solid month. Remember September/October 1999 and the Washington Agreement? Gold scorched straight through $US 300, and then fell right back into the safety of the $US 200s again. Remember February 2001 and the next foray above $US 300? Exactly the same thing happened. Even as recently as February 2002, when Gold breached $US 300 for the first time this year, it only stayed above $US 300 for four days and then retreated - admittedly only as far as $US 290.
This time, the situation is indeed different. This time, Gold has been frozen at or about $US 300 for three solid weeks. This time, the Maginot Line which is the $US 300 Gold price is being exposed as being exactly what it is, the level above which the financial Powers That Be do not DARE to let Gold rise.
And so it hasn't - yet. At the beginning of this year, open interest (all maturities) on the COMEX was about 113000 contracts. It is now 160000 contracts - with most of that increase coming in the first week of February, when Gold was making its first foray above $US 300.
According to the latest COT (Commitments of Traders) report released on April 16, short interest is not increasing in the commercial segment, it is increasing in what is called the non-commercial or "speculative" segment. In this segment, over the week to April 16, long positions decreased by 4929 contracts with short positions decreasing by 504 contracts. In the commercial segment, the data was reversed. Long positions increased by 5864 contracts with short positions increasing by 1499 contracts. "Speculators" are now long by a ratio of 2.20:1. The Commercials are short by a ratio of 2.57:1. Speculators are decreasingly "bullish", Commercials are decreasingly "bearish".
But just looking at the open interest numbers, it is plain that interest in Gold is growing. The only place you do NOT see any evidence of this over the past three weeks is in the $US Gold price. One signpost to watch for is the ratio of short to long contracts amongst the "Commercials". The lower this ratio goes, that is, the lesser the discrepancy between shorts and longs, the more pressure there will be under the Gold price.
Another signpost is obviously the state of the U.S. Dollar itself. The Dollar, as measured by the $US index, is now in negative territory for the year. The $US index began 2001 at 117.21. It is now at 116.59. Over the past week, the $US index has fallen by 1.43 points (118.02 to 116.59) or 1.2%. Gold has moved by $US 0.20 or 0.066%. The lower the U.S. Dollar goes, and the faster it falls, the harder it is going to be to preserve a $US 300 Gold price.
Another sign post, intimately related to the state of the U.S. Dollar, is the state of the U.S. Treasury's debt "subject to limit". The present U.S. "debt limit" (or debt ceiling) is $US 5.95 TRILLION. On April 4, the Treasury's debt "subject to limit reached $US 5,949,975,000,000 (that's $US 25 million below the debt limit). The debt subject to limit was frozen at this level, thanks to some self-described "tricks" indulged in by Treasury Secretary O'Neill, until April 15. As all Americans know, April 15 is "TAX DAY". The Treasury's debt subject to limit began to fall on April 16. As of the latest data available, it stands at $US 5,933,501,000,000.
Mr O'Neill has stated that he thinks his tax takings will be enough to keep Treasury debt below the limit until "June or July". We'll see. In the meantime, as long as the impasse over raising the limit (Mr O'Neill wants another $US 750 Billion) remains, the Dollar is under pressure. When the limit IS raised, the U.S. thereby admits that they have NOT paid off any debt despite their much ballyhoed series of "budget surpluses" in the late 1990s. The Dollar is likely to come under even more pressure. And at some point, the Dollar will come under enough pressure to make the task of keeping Gold at or about $US 300 impossible.
But if you are looking for a signpost that could crack wide open at any time, look no further than Gold lease rates. These rates are now at unprecedented lows. The one-year rate is threatening to go UNDER 1.0%. One month lease rates are now well under 0.25%.
Gold lease rates have been heading down inexorably ever since a very temporary and small "spike" right around the time of the Bank of England's LAST Gold Auction on March 5. Since then, at the shortest end especially (one and two month rates) they have been cut nearly in half. The cost of borrowing Gold is almost non existant, especially for periods of six months or less.
Remember the big plus $US 300 Gold spikes of late 1999 and early 2000. Both of these spikes were accompanied by HUGE (especially by recent lease rate action) spikes in Gold lease rates. In fact, in both cases, the lease rates "inverted" with short-term rates climbing above longer-term rates. Even Gold's first move above $US 300 this year back in February was accompanied by a jump in lease rates.
But ever since Gold's foray above $US 300 in February, and especially since the last Bank of England Gold auction in early March, Gold lease rates have been relentlessly falling. They are now at historic lows, and are threatening to fall completely out of sight. This at a time when demand for physical Gold is inexorably growing, and the pace of that demand growth is inexorably increasing.
Gold lease rates at these levels CANNOT be maintained much longer. THE signpost for a Gold breakout is going to be an upturn in these rates. If the upturn is a steep one, Gold might well REALLY take off. Watch all the items described in this analysis. But watch Gold lease rates closest of all.