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Gold and Energy Advisor's Real Wealth

Real Wealth #228  05/05/2009

Are Major Banks Buying Gold and Silver?



Patrick A. Heller a featured editorialist and editor for (one of the most respected numismatic publications on the market) recently served up an article entitled “Major Banks Buy Gold and Silver”.


I think it’s a very interesting article worth reading. The central focus of his article focuses on the well known and regarded commodity analyst Adrian Douglas who predicted major rises in the price of gold since 2005. Here are few excerpts...



“In November 2005, when gold was about $450, he forecast gold reaching $720 after noticing a large increase in the number of call options in shares of gold mining companies. In August 2007, when gold was $660, he noticed a significant increase in call options for the COMEX December 2007 gold contracts, where gold surpassed $1,000 seven months later.

“In July 2008, Douglas noted a huge build-up of COMEX December 2008 call options. Shortly after his prediction of higher gold prices by year end, two large banks (probably JPMorgan Chase and HSBC) sold short gold futures equal to 10 percent of annual worldwide gold production. Douglas's prediction of a major rise in the price of gold by the end of December 2008 did not occur, but he still expects a major blow up of the price.

Douglas's research has been highly reliable and his predictions have a better track record than most forecasters. When he has something to say, I listen.

“Last week, Douglas reported receiving information from two confidential sources that JPMorgan Chase and Goldman Sachs had been buying large amounts of COMEX gold and silver call options in both the June 2009 and December 2009 contracts.

“His analysis of the COMEX June 2009 gold option contracts shows that calls (which are contracts where the owner has the option to demand delivery at the contract price prior to the expiration date) outnumber puts (where the owner has the option to demand that the seller of the contract buy at the contract price up to the expiration date) by more than 80 percent. In addition to being overly skewed toward call contracts, there is an exceptionally large quantity of contracts.

“The COMEX December 2009 gold option call contracts outnumber puts by 130 percent.

“In the silver market, the COMEX June 2009 call options exceed puts by 80 percent. December 2009 call options exceed puts by 68 percent.

“Activity in options for both metals is especially concentrated in the June and December contracts.

Douglas considers options traders generally to be highly sophisticated speculators. They can purchase large quantities of contracts at very low prices if the strike prices are considered to be "out of the money" (that is, it is so far from current spot prices that the seller of the contract thinks there is little likelihood that the contract will be executed). Such traders make a profit if they acquire their options ahead of the major price moves in the futures markets.

Douglas interprets this data to mean that smart money is being positioned in anticipation of a massive rise in the price of gold within 30 days and in silver's price within the next 60 days. Then he looks for another jump in prices by December. There could be a price pullback in between the two major rises.

Douglas included two other bits of data as part of this analysis. First he notes that the call/put ratio in the stock market is usually a contrary indicator because such options are mostly purchased by unsophisticated retail investors who often get it wrong. In contrast, the bulk of activity in precious metals options tends to be from sophisticated investors. Second, both the gold and silver futures markets are now bordering on backwardation, which signals a near-term major physical supply shortage.”


Gold is trading at $904 and change up $17 and Silver is up 95 cents trading at $13.44. I consider a breakout over $1,100 for gold very likely in the next several months and given the monetary explosion we’re witnessing it very likely that we see a challenge of the $1200 per ounce for gold increasingly likely by the end of the year, and a spike to $1500 would not surprise me.


If you haven’t included physical gold in your IRA now would be a good time. I’m still recommending putting up to 25% of your investment portfolio into physical gold as its increasingly hard to deny that Washington has gone MAD with its spending. Within a few short years we’ll see the Federal Debt swell to between $31 and $41 Trillion depending on the interest rates. All one has to do is understand that our debt will soon rise past any historic peak of GDP and GNP to recognize very survival of the U.S. Dollar is in question.




James DiGeorgia



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