Submitted by Paul Mylchreest of ADM Investor Services Intl. (pdf version )
Gold and the Silver stand-off: Demarketing and Deep Value
The demarketing (in the 1971 Harvard Business Review, Kotler and Levy defined demarketing as “discouraging customers in general or a certain class of customers in particular on either a temporary or a permanent basis.” This is normally done when there is a shortage of supply or desire to promote other products) of gold may be close to running its course as it seems that sellers of paper gold instruments are attempting to induce one more sell-off to fully cover their diminishing short positions. Indeed, signs are emerging that the long Nikkei/short gold trade, which has done so much damage to gold’s price, is becoming problematic.
This could be due to one or more of: less desire to run large paper short positions by some banks/funds; rising cost of repo funding; larger bids emerging for physical bullion below $1,200/oz; and/or a view that the BoJ is reluctant to engage in ever greater stimulus. The gold basis and four major identifiable sources of gold demand (Shanghai Gold Exchange withdrawals, Indian imports, net ETF changes and net central bank changes) are indicating strong physical demand right now.
Anomalies in the silver market, such as large positive divergences in open interest and ETF holdings versus gold, suggest that entities which have been shorting gold may have been hedging (at least partly) in silver. What appears to be a stand-off in this much smaller market means that enormous volatility in the silver price is probably inevitable, especially with physical supply drying up.
It could be argued that a deep value case for gold, silver and related equities is becoming more and more apparent. For example gold, the HUI (NYSE Gold Bugs Index) and the GDXJ (Junior Gold Miners ETF) have underperformed the S&P 500 by 66%, 87% and 91%, respectively, since their peaks.