World Gold Markets: How Lack of Transparency Translates into Poor Analysis

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 |  Includes: DBB, DBS, GLD, IAU
by: J. S. Kim

Every precious metals trader that has analyzed gold prices over the past several decades knows that a common ploy the IMF and leading global Central Banks utilize to suppress gold prices in the COMEX futures markets is to announce plans to sell gold despite their total lack of commitment to executing their announced plans.

For example, the Bank of Italy announced in late July, 2007 their plan to sell an estimated 1,740 tonnes of its gold reserves to help pay down its national debt. At this time, this announcement moved the gold futures markets lower because many analysts found this announcement shocking in light of the fact that Italy had always previously stated that its gold reserves were “untouchable”. However, any gold analyst worth his or her weight in salt immediately knew that this announcement was a complete sham because Italy’s announced sales, as considerable as they were, would never have significantly contributed to its declared end goal of solving their national debt problem.

Thus, simply by drilling down to the facts behind the Bank of Italy’s surface level announcement, one would have easily deduced that an ulterior motive much different than the stated motive existed. Sure enough, the Bank of Italy never followed through its announcement to sell its gold reserves yet still achieved its likely ulterior motive of temporarily halting the rise in gold prices and driving them lower.

More recently, at a G20 meeting in late March 2009, the IMF announced its plan to sell 403 tonnes of gold reserves to address some problems of liquidity. Even though this news was merely old news that was being recycled from the end of 2008, the prominent forum which the IMF leveraged to re-release this old statement focused the attention of neophyte gold analysts on fears of gold supplies flooding the market in the future. And just like magic, we experienced déjà vu again when gold prices plummeted lower (from $928 per fine troy the day after the announcement to a low of about $880 an ounce just one week later on April 8th). When I heard this announcement, I was at once immediately very skeptical of the IMF’s commitment to execute this plan.

If the IMF truly makes good on its threat to sell 403 tonnes of gold in the future, the IMF would fail to accomplish their goal of flooding markets with gold supply and would accomplish nothing more than the transference of global wealth from Western nations to Eastern and Middle Eastern nations as I surmise that China, Russia, select OPEC nations and other nations with large trade surpluses or a desire to decrease their U.S. dollar exposure would be more than happy to absorb the available supply. Thus, I believe that the purpose of their announcement was nothing more than a smokescreen that will never experience full execution designed to temporarily drive the price of gold down.

China’s recent revelation that it secretly increased its gold reserves by 76% over the past several years also surprises me not in the slightest as I have predicted China’s engagement in such activities for a couple of years now*. China’s revelation proves that there is little transparency in global gold markets and that the “officially” reported numbers have little relevance as they can be, and most likely will continue to grossly misrepresent the truth.

As skeptical as I was about the Bank of Italy’s announcement and the IMF announcement when they occurred, I am equally skeptical of China’s announcement. Given China’s history of public comments about their grave concern regarding the stability of the U.S. dollar and their years of engaging in secretly increasing their gold reserves, when it finally publicly reveals a new gold reserve figure, for what reason should we give this announcement credibility as being truthful?

Governments take full advantage of the fact that they can easily convince millions of unthinking people to believe something as long as they print the statement in writing and in a “credible” newspaper. Ultimately, I suspect that China’s actual gold holdings of 1,054 tonnes, up from their last reported figure of 600 tonnes, are in reality, significantly higher than this amount (as this figure still only represents a tiny 1.6% of their overall reserves). Though I can only speculate about the timing and nature of China’s recent gold revelation, I believe that China made this revelation to “test the waters” and observe the impact of their announcement on gold markets. Ultimately such a revelation, even if it does not fully disclose China’s true gold position, will significantly assist its final determination of its end target percentage of gold reserves.

Furthermore, I am confident that China has not only been secretly supplementing their gold reserves, but that they have also been very quietly adding significantly to their silver reserves, their petroleum reserves, their agricultural reserves and their reserves in base metals. Though base metals will most likely continue to experience a longer timeline to significant recovery than precious metals, they too, will eventually strongly recover in the coming years.

The overwhelming majority of analysts state that China’s strategic hands are tied by its massive holdings of U.S. dollar denominated debt and that it can’t possibly dump their massive holdings of U.S. dollar denominated debt without hurting its own economy. This is just not true. There are plenty of means to hedge against eventual significant U.S. dollar decline and China has already revealed its partial hand with its significant additions to its gold reserve.

Just a few days ago, I wrote an article about deflation and gold investments in which I stated, “We’re likely to see some downward pressure in the gold and silver futures markets in the very near term and specifically next Monday [Monday April 27th]“. Indeed yesterday, gold dropped in the COMEX markets by $6.80 an ounce (the ask price closed at $907.20 an ounce), though silver actually ended up closing just about even, higher by one penny an ounce.

Furthermore, today, Tuesday, April 28th, I predict that the downward pressure in COMEX gold markets is likely to continue and I would not be surprised to see gold pushed below $900 an ounce at some point in intra-day trading today (author’s note - I released this article about 11 hours before COMEX markets opened in New York on Tuesday).

However, these two days of downward pressure (if another downward day materializes today as I believe to be likely) do not negate the likelihood of another strong leg higher in both gold and silver in May or June. While the gold markets were obviously buoyed at the end of last week as a result of China’s revelation, knowing that the gold markets would dip yesterday and very likely today, while also understanding that these dips do not signify a reversal in trend has nothing to do with fundamental nor technical analysis, but rather with understanding the complexities of the price suppression schemes that the U.S. Federal Reserve and the U.S. Treasury execute.

One has to understand all the games that are played in these markets to not be misled by the massive amounts of “white noise” that exist in precious metals markets that are purposely created by the financial oligarchs that control the U.S. Federal Reserve and her sister Central Banks. Unfortunately, the analytical world of gold is full of gold neophytes that have not put in the considerable amounts of research necessary to understand either the fundamentals of the gold market that drive its long-term behavior or the complex relationships among Central Banks’ gold reserves, currency markets, and the U.S. Treasury that drive its short-term behavior.

*In reference to the article above, the author publicly stated his belief nearly two years ago in June of 2007 that it was an erroneous assumption to believe China’s strategic options in currency markets were handcuffed by US debt. In addition, the author specifically stated his belief in China’s secret accumulation of gold reserves multiple times over the past two years through the private forum of his SmartKnowledgeU™ Platinum Membership. For years, he has instructed his clients regarding how to create wealth from gold investments and silver investments during the ongoing financial crisis.