Why Gold Prices Didn't Really Rise Last Week

Last Wednesday afternoon, after the FOMC announcement, the price of gold (in dollars) went up. On Thursday gold ETF GLD (GLD) closed at its highest level since February 25^th. But what actually happened? The FOMC announced that it would begin buying U.S. treasuries on the open market, this at the same time that U.S. treasury auctions are tripling and quadrupling their bond sales in order to pay for the massive increase in the U.S. budget deficit.

Click to enlarge:

In the above chart, the dollar price of gold is represented by GLD and the dollar indexed against a basket of foreign currencies is represented by dollar index fund UUP (UUP). Before the FOMC announcement Wednesday afternoon, we can see that the dollar was holding steady down about 1% from the previous day, and the price of gold dropped by 3% to 4% with no apparent explanation.

This smacks of manipulation (shorting gold futures) by insiders who wanted to keep the gold price under control and prevent it from popping over $1000 when the Fed made its announcement later in the day. By the close of trading Thursday, the dollar had lost about 4% of its value against a basket of major foreign currencies since the preceding day’s FOMC announcement; a huge, almost unprecedented one day drop. Foreign holders of U.S. long bonds lost 4% in a single day on an investment which yields only about 3% annually.

At the very same moment, gold prices spiked, closing Thursday about 7% higher than where gold was trading at the time of the announcement. Of that increase, 4% was due to the immediate decline of the dollar index, and the other 3% most likely was due to hedging against the expected inflation which the Fed’s action would cause.

Friday and Monday the dollar and gold price were basically flat, until late Monday afternoon we see the price of gold declined a bit. In the last hour of trading on Monday, there was a huge volume of equity buying across the board in a massive wave of irrational exuberance, especially in the financial and real estate sectors. Apparently many people took profits in GLD at this time, liquidating shares to use the money to invest in their favorite equities.

This spike in buying near the close of trading Monday also smacked of manipulation, as the PPT wanted to create the appearance of widespread acceptance of Geithner’s plan to enlist private hedge funds to buy so called “toxic” assets from the banks, at the taxpayer’s risk. This knee jerk reaction was before these buyers had time to read the fine print. The hedge funds will be given cheap loans of taxpayer money for at least 94% of the purchase price of these assets, and risk only a maximum of 6% of their own money. So the taxpayer takes 94% of the risk, and gets to share 50% of any future profits.

Once this information is digested, Monday’s stock rally will undoubtedly be reversed.

Calling these assets “toxic” is a scare tactic used by the banks to get more taxpayer money. They repeatedly claim that there is no way to value these assets.

In reality, there is one sure way to value these assets. Let the market do it. There are plenty of buyers for these mortgage backed securities and CDO’s, even the subprime and alt-A variety, at the right price. If the banks had put them on the market a year ago, they would have gotten a lot more for them than they could today, but they are hoping against hope for an economic recovery or taxpayer bailouts to pay for their recklessness and poor investing skills. And if they were to reveal the details of their true holdings, it would be an admission of insolvency, and the huge amount of continuing financial support which would be necessary from taxpayer bailouts to keep banks afloat that should have been put into receivership in the first place.

So why would the Fed be buying treasury bonds on the open market at this point in time? Wouldn’t it be more logical to just sell less bonds in the government auctions rather than be buying and selling treasury bonds simultaneously?

Treasury bonds are really just IOU’s of the federal government. When they are sold to finance the government’s deficit spending, they take money out of circulation, which is bad for the economy at a time when it needs that money to stimulate economic activity. By buying treasury bonds on the open market, (also known by the euphemisms “monetization of debt” and “quantitative easing”), they increase the supply of money and replace some of the money they have just removed from circulation in the bond sales which could hamper the recovery.

So why all this smoke and mirrors of adding and removing money from circulation at the same time? Apparently to make it look like we are selling enough treasuries to cover our new unprecedented levels of deficit spending.

So did the price of gold actually go up? Only in US dollars. What really happened? The value of the dollar went down, and the price of gold worldwide remained basically unchanged.

Click to enlarge:

So over the five day period from Tuesday’s open to Monday’s close, the above chart shows that the dollar had lost about 4% of its value and gold and long treasury bonds (as represented by treasury bond index TLT) (TLT), had gained about 2% in value. Since both prices are denominated in dollars, we would expect to see a corresponding 4% increase in the value of gold and treasuries, so in real terms, they both declined by 2%.

Why would treasuries decline in real value by 2% in response to the announcement that the federal government would be buying $300 billion worth over the next six months? This added demand would be expected to cause an increase in value, above and beyond the 4% decline in the dollar’s value. The answer seems to be that the bond market recognizes that the overall supply of treasuries will be increasing drastically, and this government buying of its own debt is all smoke and mirrors, an act of desperation.

Click to enlarge:

The chart above shows that gold held its value against the Australian dollar, the British pound, the Canadian dollar, the Euro, and the Swiss Franc (as represented by currency ETFs Australian dollar ETF (FXA), British Sterling ETF (FXB), Canadian dollar (FXC), Euro (FXE), and Swiss Franc (FXF) for days after the Fed announcement, until the last hour of trading during Monday’s buying spree on the US equity markets. It also highlights the mysterious decline in gold price in early Wednesday trading before the Fed announcement, as denoted by the dumping of GLD.

Disclosure: No positions

Comments

[HonestMoney:]

Buy coins, bars, CEF, GTU, goldmoney.com and bullionvault.com

Get out of GLD/SLV

Gold Manipulation Evidence Mounts:
news.goldseek.com/Leme...

Perth Mint Certificate Exposed
news.silverseek.com/Go...

Risks in Owning GLD
www.marketskeptics.com...

Can We Trust the Silver ETF?
news.silverseek.com/Si...

Where Is the ETF's Gold?
www.safehaven.com/arti...

Ten Reasons to Avoid the Gold ETF
seekingalpha.com/artic...

How the Silver ETF Differs from Real Silver
seekingalpha.com/artic...

The Problem with GLD and SLV ETFs
seekingalpha.com/artic...

Mar 24 08:24 AM

[arlin:]

excellent article

Mar 24 08:45 AM

[kelm:]

If you watch the minute by minute action in the gold market you can see that there is significant "manipulation" by funds. It is a thin market by comparison to many and so it is not too hard for them to jockey the price around for limited periods of time. Last week was short covering in a market that looked very overstretched and was due for a decline. I think we are starting to see that trend re-assert itself. The rally early in the year has been linked by some to a small number of hedge funds building up positions, not broad based buying. I have personally watched gold run-up $15-25 each day for three days running a week or so ago right around 8:30 a.m. eastern which looked to me like some fund "planting" the price higher hoping to incite a rally.

To your overall point though, I agree. In other currencies this was of little matter.

Mar 24 09:15 AM

[Cesato:]

Retail investors will drive the price lower to attract demand from buyers who are currently in the sidelines (i.e. jewerly), once those buyers are lured back into the market then the price will rise once again, meantime the trend is down, sell USD 30 rallies and you will stay in the trend. The manipulation theory has never had real support, from my standpoint, if you got the money you move the market at your will so you can make good money, as simple as that, USD 800 will be a good buy later in the year. On the other hand Mining stocks will do extremely well, short term, that is a good alternative, miners lagged for a long time and will outperform Gold itself for now.

Mar 24 09:34 AM

[EE:]

Yep, good job.... Manipulation is the cause and more so with silver. But it goes on with most all the futures. Who does it and why is it allowed is explained by Ted Butler who studies the silver & gold markets. Then, what can we do to make these markets fair for the actual producers & users. I sent the following to others hoping to spread an idea.......I have written to the SEC, CFTC, TREASURY, SENATE, & CONGRESS about requiring product deliveries to and from on futures contracts beyond 10 or 20 to avoid long and short manipulations. Naked short positions in any market, penny stocks thru futures hurt the many and the markets themselves for benefit of the rich who are never satisfied. I just read the smart guys like Butler, Hommel, Sinclair etc and wish others would study their logic and spread the word in time to help save our country which is close to going belly up! If new rules are not in place soon, can you imagine how high the speculators will move crude oil once folks see the global economy show signs of improvement? $200+/BBL... But, if the big money, hedges or banks can't take or provide delivery of the messy stuff ......................... manipulation should be limited. I hope. SEE ( butlerresearch.com ) Currently the big money knows how technical charting works so they move the market to rape the small money over & over again. They have the co-operation of the regulators & treasury to manipulate the Dollar and whatever key commodity they feel important at the time. Anyone thinking we are in a free market democracy is flat out wrong! China is playing the game to acquire raw material assets on the cheap and when finished will destroy the Dollar, expose the manipulations, to show how crooked the futures are. Then replace our markets with their own golbal futures market. So, if we want a chance to control market regulations we must clean up the sham ASAP. In the mean time folks, take delivery, reduce holdings in GLD, SLV and futures contracts before defaults set in. For most of you, smarter than I, we better figure something out to make the physical market lead the paper market instead of the paper market manipulating the physical. Supply/demand must rule not big money and goverment greed. Any body in position to add strength to GATA, Butler, etc? I hope so!

Mar 24 09:51 AM

[Truefire:]

The Hedgies just got into bed with the banksters. They will be complicit in the ruination of our once great nation.

For all you schmucks that buy into this bear trap, you also share in this, for without you this chirade would not be possible. So what is it, are you looking to profit from the destruction of our country? The only play here is to short this bullshit rally and you call the gold bugs "anti american". What an absolute disgrace. You WILL reap what you sow.

What a mad, mad, mad, Madoff world we live in.

What's the share price to sell your children into indentured servitude?

The whole system is rigged, we all know it.

Mar 24 10:20 AM

[Yossel:]

Cogent, well-argued and illustrated, intuitively firendly, and --- wait for it --- accurate!

Mar 24 01:08 PM

[5142152-337:]

kelm and EE: Right on!

Buying PHYSICAL silver and gold is the ONLY answer to (in time) eliminate the manipulation.

Truefire: You have to bite your lip and relax! Educating the uneducated in precious metals AND the world of greedy politicians and businessmen is a very difficult task. We must persevere. I have a group of friends that just don't get it. I'm working on them. You keep it up too. Our only chance is to educate "them".

Mar 24 01:47 PM

[searcher:]

Reading these remarks is heartening when I'm nearly discouraged by the lack of faith in our present day. Such faith in the eternal is inspiring. Tuly, faith is golden.

Mar 24 03:29 PM

[omooc:]

Good analysis. The prediction, done before today's (3/24/09) market opening, certainly bears fruit, as GLD closed at 90.95, down 1.13 today. This begs the question: what is likely to happen tomorrow?

Mar 24 11:10 PM

[judge sixki...:]

For all the commentary on market manipulation and robbing taxpayers, very few people accept the idea that this has been intentional. Oh no, that can't be true, that would be a conspiracy, and that doesn't exist, except when the government charges someone with it, right? Wrong. It is wealth consolidation by the "elite", period. Money changers and most government "officials" don't care about you and me. They will whisper sweet promises in your ear while picking your pocket and stabbing you in the back every time, banking on the hope that we won't do a damn thing about it. But by all means, keep letting them take your money. It's easier not to fight back.

Mar 26 03:05 PM

[unclej0:]

The conversation here is chilling. All the same, it cannot be ignored. I have heard rumors of empty boxes in the vaults. I am not in the gold market. As an outsider, I have no business entering something I don't understand. ( Excepting marriage, of course.)

Obviously, minimally regulated capitalism is unworkable. It is a parasites' heaven.

Mar 26 08:56 PM

[Conan the B...:]

unclejo: not to worry, most people treat Market, Commodity, stock manipulation as if it were something they had never heard of but now they are all in a "Tizzy" because its a bad word.

Its been around for decades. The Specialist system or "market makers" were allowed to have knowledge of future transactions by Institutions both on the Buy and Sell sides, they, in turn, used that knowledge to make transactions for themselves. It was call the Specialist Book and the transactions were called Frontrunning.

Another major form of manipulation which everyone ignores because it is a way of life, it has always been done and continues to be done without any reprecussion whatsoever: Window Dressing.

Mutual Funds alter their holdings at the end of Every Quarter to make it look as if The Popular stocks were in their portfolios. They do not have to tell you what they are Holding during the quarter.

Popular stocks always look better to a prospective Fund buyer. Where is the hue and cry against
"Window Dressing" ???

Technical Analysis, which the Author uses, gives you an edge. To those people who do not use it, It smacks of Downright Market Manipulation because if enough Technical Analysts see, use and inform their clients, and they all act on it, then it is also a form of Manipulation.

But Its okay to use TA because You are on the Manipulative side...yeah right.

Boo hoo, the "Market is being manipulated".

They do it, we do it, Mutual Funds, Program Traders, Day Traders, momentum players, TA people, hedge funds and now the Government.

Big Deal.

Mar 29 01:45 AM

[munish Sabh...:]

I agree with the contributor , you can not supress the Truth for long. Go Long Gold ,Short DOW
Jai HO

Mar 29 12:41 PM