Shorts on Gold ETFs Are Nearing a Big Squeeze


"There has been an increasing number of investors taking short positions on gold exchange-traded funds, but they better watch out for what's ahead this summer."

There has been an increasing number of investors taking short positions on gold exchange-traded funds (ETFs)—but they better watch out for what's ahead this summer.

In fact, each day that passes brings us closer to what could be the day of reckoning for those holding massive short positions on the ETFs for gold, silver, copper and related investments.

You see, the Federal Reserve Bank of Kansas City in late August will host an economic policy symposium in Jackson Hole, WY. Speaking at the conference, as he did in August of 2010 when he introduced the second round of quantitative easing, will be Federal Reserve Chairman Ben Bernanke.

There is much to believe that QE3—if not declared sooner—could be announced at Jackson Hole. Should this happen, the prices of gold, silver and copper will likely soar like back in 2010.

That means anyone holding shorts on gold ETFs or similar investments could find themselves scrambling to cover their positions.

QE2 and Gold Prices

QE2 consisted of inflating the Federal Reserve balance sheet through the purchase of $700 billion in U.S. Treasury bonds. QE2 ran from November 2010 to June 2011.

During that time, the PowerShares DB U.S. Dollar Index slipped about 2.5%, while SPDR Gold Shares rose 12%, iShares Silver Trust 25% and iPath DJ-UBS Copper TR Sub-Index 7.3%, as investors piled into hard assets.

This trajectory in price trends for the greenback and metals ETFs has since reversed. The dollar index is up 6.6% since July 2011, and up about 2% over the past few months.

For the last three months, GLD is down 2%, SLV is off by nearly 12%, and JJC is down more than 13%.

Even though famed investors such as Jim Rogers and George Soros buy gold, the point of view of investing icon Warren Buffett has led his followers to remain bearish on the yellow metal. Just look at what Buffett had to say about gold in March 2011, when GLD was trading around $140.

"I will say this about gold," said Buffett. "If you took all the gold in the world, it would roughly make a cube 67 feet on a side. . .Now for that same cube of gold, it would be worth at today's market prices about $7 trillion dollars—that's probably about a third of the value of all the stocks in the United States. For $7 trillion dollars, you could have all the farmland in the United States, you could have about seven ExxonMobils, and you could have a trillion dollars of walking-around money . . .Call me crazy, but I'll take the farmland and the ExxonMobils."

Shorts on Gold ETFs

Investors thinking like Buffett have been constructing massive short positions on gold ETFs as well as other metals-related investments.

A 5% short float is considered to be troubling. At present, there is a 4.47% short float for GLD, and 4.40% for SLV.

Short floats are much higher for individual company stocks in the industry.

For example, Eldorado Gold Corp. now has a short float of 27.60%. Now trading around $13.00 a share, the 52-week high for Eldorado Gold is $22.12. Before QE2 was announced in the summer of 2010, Eldorado Gold Corp was trading for under $16.

But the monetary stimulus measures happening around the world are reason to be bullish on metals.

Central banks have been working together to bring the world out of The Great Recession, and will continue to do so. The Bank of Japan initiated a round of stimulus measures earlier this year. China appears to be on the verge of another massive program.

QE3 could soon be introduced to the world in late August at Jackson Hole by Federal Chairman Bernanke.

If so, the great sucking sound being heard around the world will be the shorts on silver, copper and gold ETFs being squeezed.

Jonathan Yates
Money Morning

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