Gold: Is Something Big Afoot?

08/21/2013 9:00 am EST

Focus: STRATEGIES

Brien Lundin

President, Jefferson Financial, Inc.

Gold has skidded to a stop and is racing back upward. An issue to watch is the rapidly developing supply squeeze in global gold supplies, reports Brien Lundin of The Gold Newsletter.

Gold stocks have been gaining favor among some traders, at least as a contrarian play, with both Dennis Gartman and famed hedge David Einhorn recently talking the sector up.

Meanwhile, registered gold stocks in COMEX warehouses (the gold that is available to settle futures contracts), have just dropped to the lowest levels ever.

And reports from China show that demand is exploding. The Shanghai gold exchange reports that it delivered 1,098 tons to buyers through the first half of this year—an amount equal to all that it sold last year.

At this rate, China is on track to absorb this year's entire global mine supply—and more.

It is obvious that something is up in the gold market. And that something is almost assuredly a massive transfer of gold from the West to the East.

The surging demand in Asia is the direct result of the efforts to drive the gold price down this spring, most notably in the April take-down.

Increasing demand and a limited, diminishing supply is certainly not the recipe for lower prices. And consider that all this is happening during the supposed slack period in gold demand.

When physical demand from India and the jewelry trade beings to heat up in a few weeks, then things could get very interesting.

So what to do about it? Again, it's time to pick up some recommended junior gold mining stocks with identified resources that are selling at bargain levels.

We place a premium on companies that are in production. In the gold sector, this includes GoGold Resources (GGD) and Sandstorm Gold (SAND).

In the silver sector, the list includes Endeavour Silver (EXK) and SilverCrest Mines (SVL).

There is some risk in the gold and silver price at this point, if the economic data begins to once again confirm a stronger rebound that would hasten the end of the Fed's QE program.

But other indicators we're seeing now of extreme tightness in the physical gold market, at a time when demand should be slackening, is whispering that something very big and important is afoot in the gold market. We would do well to be prepared.

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