Investors following the housing and the bond markets will find Ambrose Evans-Pritchard’s “Banks set to call in a swathe of loans” an interesting, if not frightening, read. “The fast-moving crisis at two Bear Stearns hedge funds,” the article notes, “exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.” (The article is on a forum-type site, and the older this post gets the further down the site viewers will have to scroll.)

The article further notes that Bear Stearns has now put up $3.2 billion, a quarter of its capital, to rescue one of its hedge funds. This is the biggest bail-out since the Long-Term Capital Management crisis in 1998.

For readers not following the bond market in 1998, the Long-Term Capital Management crisis so threatened the bond market that the Fed engineered a bailout.

Any wonder that the large commercials recently reduced their long dollar positions? (See June 26 post below.)

When I woke to lower metal prices this morning, I was somewhat taken aback. I had just read Gene Arensberg’s report on the huge reduction in the large commercials’ long position in the dollar. The LCs, who had been bullish on the dollar, reversed course last week. As Arensberg notes, the LCS are thought to have a crystal ball when it comes to predicting short to intermediate-term futures prices.

For the last reporting period, the LCs dumped 7,042 USD net long contracts for a whopping 71% reduction in their exposure to the dollar. Looking a little further back, the LCs appear to have completely abandoned the dollar. May 1 the LCs were long 23,380 USD contracts; as of the last reporting period they held only 2,811 net long contracts, an 88% reduction. Now that is a position reversal of monumental proportions.

The dollar is, of course, the other side of the coin from gold and silver. Investors buy gold and silver primarily as hedges against a decling dollar. So, when supposedly astute investors dump dollars, that is bullish for gold and silver. And, Arensberg posted another report on the LCs’ position in gold last week, on which I commented in my June 18 post:

Meanwhile, large commercials (LCs) decreased their net short gold position by 38,391 contracts or 28% for the weekly reporting period ending Tuesday June 12. This is considered bullish as it is commonly believed that the LCs have a crystal ball when it comes to short-term swings in the price of gold. When LCs see lower prices ahead, they increase their short position; when they see higher prices ahead, they reduce their net short position.

So, the LCs have not only reduced their long position in the dollar but also have reduced their short position in gold. Despite today’s lower prices, these are bullish developments for gold and silver.

A final thought: the LCs’ crystal ball sometimes gets cloudy, making it difficult to read. In late 2005, they were short huge positions in gold and silver, and by May 2006 had lost billions as gold and silver climbed to decades high prices. So, the LCs’ recent activity in the dollar and the gold futures markets are not guarantees of higher prices for gold and silver, but I’d rather see the LCs bullish on gold than bearish.

Three months ago, CMIGS posted an article about The Perth Mint’s plans to close its Lunar Series. At that time, final orders for the Series were to be taken the last week in June. Now, final orders will be taken the last week in August.

The extension came about because the Treasury took longer than expected to approve the minting of the silver rat, ox and tiger coins, which were needed to complete the silver coins in the Series. The twelve gold coins were minted in their respective years.

The Lunar Series gold coins became popular with both gold investors and gold coin collectors worldwide. The exquisite quality of the coins and the popularity of the Lunar Calendar appealed to collectors. Bullion investors were drawn to the Series 1-oz gold coins because they were priced competitively with the best-selling American Eagle gold coins. In addition to gold coins from a recognized mint, investors also received the potential for the coins to pick up collector premiums, which they did.

CMIGS started recommending the year 2000 1-oz Gold Dragon coins when gold was trading in the $300 area. Today gold is trading in the $650 range, but the 1-oz Gold Dragons are $900 coins. The year 2002 1-oz Gold Horse coins also have tacked on big premiums, but the Dragons remain the key coins in the Lunar Series.

The Swiss National Bank announcement that it will be selling 250 tons of gold over the next two years continues to get a lot of press. However, the gold market is treating the news with disdain. Overnight in the Asian markets, gold rose to its highest levels in more than a week with gold hitting an intraday high of $656.50 an ounce before declining to $656.20/oz. Meanwhile, silver hit an intraday high of $13.28/oz overnight in Asia, silver’s highest prices there since June 8.

The real determining factor for the price of gold is the value of the dollar, the world’s primary reserve currency, not who is selling gold. At CMIGS, we have always maintained that the reason for buying gold is the deteriorating dollar. The fact that the US is doing nothing about its deteriorating financial state of affairs and may yet get involved in a third war overwhelms any additional gold sales, even if the sellers are the Swiss.

Gold and silver have been the ultimate hedges against currency debasement since the inception of paper currencies, and Asians well know that. Further, Asia is awash in dollars, and what better time to buy than when someone else announces a sale?

LCs decrease net short position by 28%

Meanwhile, large commercials (LCs) decreased their net short position by 38,391 contracts or 28% for the weekly reporting period ending Tuesday June 12. This is considered bullish as it is commonly believed that the LCs have a crystal ball when it comes to short-term swings in the price of gold. When LCs see lower prices ahead, they increase their short position; when they see higher prices ahead, they reduce their net short position.

Some readers who have followed the activities of the LCs may say that the LCs determine, or at least greatly influence, the intermediate moves in the price of gold (and silver). This writer would not disagree with that assertion. Regardless, big changes in the LCs net position can portend signficant price moves in gold and silver.

For an excellent, but lengthy, analysis of the gold and silver markets, with extensive commentary on the LCs net position changes, read resourceinvestors.com’s Got Gold Report, which appears biweekly.

The Swiss National Bank, Switzerland’s central bank, just announced plans to sell 250 metric tons of gold over the next two years. The gold market reacted with a yawn, actually posting higher prices as the news spread, and appropriately so.

The sales will be within the Central Bank Gold Agreement, which limits sales by fifteen European central banks to 500 metric tons a year. Over the next two years, as the Swiss sell, they will sell annually only 125 tons of the allowed 500 tons. This is gold that the market had already expected to be sold.

Further, it should be noted that between 2000 and 2005 the Swiss central bank sold 1,300 tons, and during those five years the price of gold more than doubled, evidence that the Swiss have no crystal ball when they buy and sell gold.

Resourceinvestor.com has posted an article with still more commentary on the Swiss National Bank announcement.