Gold is making a nice little move up since it hit our initial buy level around $1110 last Friday. (See the details here.) The futures closed at $1146.40 Tuesday, and any of our traders who stayed in that trade are now up about $4,000 per contract.  Should they get out now, or wait for prices to move higher?

After a long slow decline that has brought the futures down from above $1300 an ounce in January to a low at $1072 in July, gold is starting to recover a little. We’ve seen a recent price around $1170, and it looks like the market will try to get there again this week or next. It is time to pay attention to gold again.Gold_futures_Oct._6_2015.png

Gold is perhaps the most actively manipulated of any major asset class, so the price action is often abnormal and impossible to explain as normal price discovery in a free market.

Vicious take-downs can happen any time, and probably will. But we are starting to believe a long-term bottom is in or forming here. We may retest prices below $1100 in this quarter or next. But the long-term forces acting to drive gold prices up will be hard to stop.

One consideration is the dramatic movement of physical gold from the West (that’s us) to the East, mainly China and India. A related development is the vast difference between derivative trading in gold futures and the amount of physical metal available to satisfy those claims.

One estimate contends that each ounce of gold available for delivery on the New York COMEX exchange has 259 “owners.” But almost all the trading is futures contracts; very little physical gold actually changes hands.

Up to the end of August this year, COMEX deliveries of bullion were only 40 tonnes. By contrast the Shanghai Gold Exchange delivered 1,755 tonnes of gold in the same period, as much as 65 tonnes in a single day.

That volume requires a massive flow of bullion from the West to the markets of the East. Typically proxies for the Chinese government buy gold in London, have it re-refined in Switzerland, and ship it to China, either for delivery or as reserves of the People’s Bank of China.

According to one Chinese source, the Government of China plans to accumulate 8,500 tonnes of gold, about five times the current announced holdings and about equal to the US government’s hoard.

When you are buying gold in those quantities, you have an obvious interest in keeping the price low — and obvious difficulties in doing that. One result is a growing disconnect between the price for “paper gold” and the demand for bullion. 

The system is clearly at risk. If even a small proportion of the longs decide to “stand for delivery” – perhaps as little as 4% – the system simply could not meet the demand. What happens to the price of gold then?

Unknown risks make us nervous. So for our traders who are still holding their positions from Friday, it’s time to take at least partial profits.

The Fed Open Market Committee minutes will be released tomorrow. The next FOMC meeting, with the usual empty talk about a rate increase, is only two weeks away. On Thursday Q3 earning season begins, and there may be some ugly surprises. Perilous times. Take the money and run. You can always get back in later.

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Chart: Gold futures, Oct. 6, 2015, intraday, 60-minute bars