Monday, December 8, 2008

Gold to Break Upside, Dollar to Break Down


Gold to Break Upside, Dollar to Break Down

Lance Lewis Nov 21, 2008 9:30 am

Just to update everyone on gold. Last week, I noted that the 3M GOFO was about to go negative, indicating that gold was moving into backwardation.

Unlike other commodities
, gold very rarely goes into backwardation: This only occurs when 1) The market fears a collapse in the currency, and/or 2) The market is worried about counterparties making good on their promise to deliver gold (which was briefly the case in 1999, when the Washington Agreement was announced and shorts were squeezed).

This morning, gold officially went into backwardation for the first time since the announcement of the Washington Agreement in 1999, which sent gold shorts scrambling to find physical metal after the world's major central banks agreed to limit sales of gold going forward and ending the one-way trade to the downside in gold that had been in place in the late 1990s.

We know gold is now in backwardation because the gold forward offerred rate (GOFO) has now gone negative. The 3M GOFO has fallen 12 basis points to -0.07%, and the 1M GOFO has fallen 20 basis points to -0.1167%

It's no coincidence that gold appears to be breaking out to the upside this morning, and likely indicates that the US Dollar Index will soon be cracking to the downside.

Buckle up, gold bulls. Gold is about to begin a melt-up, in my humble opinion.

Lance Lewis is the principal of Lewis Capital, a Registered Investment Advisor (RIA) in Dallas, Texas. He is responsible for portfolio management and investment research
for all of the company's managed assets.
Prof. Lewis,

I just wanted to email you a congratulations on your very accurate assessment and prediction for the gold market, particularly your insights on gold's recent backwardation, vis-a-vis the GOFO rate. I must say you have been the only market analyst who has not only been correct on your assessment but correct as to the specific timing and the trigger point for the market turn as well. Very well done indeed.

I am curious as to where you think gold will go from here in U.S. Dollar terms. You mentioned on Minyanville that gold backwardation intimates either a loss of confidence in the denominating currency (U.S. Dollar) or shorts scrambling to close out their positions (perhaps leading to a short squeeze). Could backwardation imply both occurences? Where do you see gold headed, short and long term ?

Thanks again for your impressive performance.

Best regards,
Minyan George

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