Did any of you goldbugs catch Jim Sinclair's BS over at MineWeb about a conspiracy between the hedge funds to short gold stocks? Let me help you understand what is really going on.
Jim Sinclair the Conspiracy Nut is full of it once again. Hedge funds buying gold futures and simultaneously short selling gold stocks is normal market action!
Sinclair's claim that gold stocks have been performing terribly in the face of the rising gold price because of some conspiracy by the hedge funds sounds like Bill Smurphy's been writing his script! These drongles need to be set straight.
While some hedge funds would almost certainly be going long gold futures and simultaneously going short the gold stocks as Sinclair claims, along with myriad other ratio type trades, this does not mean the hedge funds are responsible for the poor performance of gold stocks compared to the gold's performance. The current short interest figures for gold stocks do not support Sinclair's absurd conspiracy theory.
A total short interest of 1M shares would mean nothing for a stock that routinely trades 1M shares per day, but would be very significant for a stock that normally only trades 100,000 shares per day.
No way would a hedge fund doing a ratio trade buy gold futures and simultaneously choose to short sell the illiquid stock of a small gold company such as Vista Gold or Richmont Mines. And they certainly wouldn't choose the stock of a silver-zinc exploration company such as Apex Silver. The type of stock they would choose is one with good liquidity and a high positive correlation to the gold price, such as Newmont . Also, where stocks have an unusually high short interest there is a company specific reason for the short interest. Kinross Gold has a high ratio of around 6.2 , but this is due to arbitrage associated with the KGC-TVX-ECO merger.
You often see a large increase in short interest when a company does a new debt or equity financing, particularly when the financing involves the issue of convertible notes. It is common practice for speculators who are buying a convertible note issue to simultaneously short sell the stock with the aim of locking in a risk free return. Last year Durban Deep issued US$60M in convertible notes. These notes are convertible into a total of 16M Durban Deep shares and at least some of the buyers of these notes would have hedged their position by shorting the stock. The increase in Durban's short interest from around 1M shares to 9M shares in November was likely the result of the convertible note issue. Durban's short interest had fallen to 6.4M shares by the end of December, giving it a rather modest ratio of 2.1.
The total short interest across the entire gold sector reflects a healthy amount of skepticism in the sustainability of the gold rally, but it is definitely not unusual nor large and has remained fairly constant over the past few months. There is absolutely no evidence that the ratio trade asserted by Sinclair is the primary reason for the recent poor performance of the gold sector. At this stage Sinclair's commentary represents the opinion of just another conspiracy nut gone amuck.
When stock prices fall further than most people think they should or don't go up as much as they are supposed to, the conspiracy nuts come out of the closet and point fingers at the short sellers.
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