Believe it or not, there could be a silver lining in the ongoing bloodbath in precious metals markets where, today, losses now exceed the shocking declines of late last week when the gold price tumbled more than $80 an ounce and silver plunged nearly $2 an ounce.
Important long-term technical levels were breached on Friday after futures markets were hit with massive sell orders totaling 400 tonnes of gold in what Ross Norman of Sharps Pixley said "had the hallmarks of a concerted short sale" in this report earlier today.
If this was an engineered short sale designed to take prices lower by triggering stop loss orders, it has been hugely successful as the gold price is now about $200 lower than it was when markets opened on Friday.
So what's the silver lining in a two-day price decline of almost 13 percent for gold?
Well, however it was that panic selling ensued, one thing that most futures traders probably don't realize is that they buy and sell "paper" gold and silver for entirely different reasons than the biggest physical buyers of the metal do.
Most futures traders in the U.S. and, to a lesser extent, owners of such gold ETFs as the SPDR Gold Shares ETF (GLD) and the iShares Gold Trust (IAU) tend to sell when the price is going down and buy when the price is going up.
But, the world's biggest buyers of the physical metal in Asia do just the opposite - they buy when the price goes down.
And they don't just buy paper, they buy the real thing.
This could lead to all sorts of interesting possibilities given that gold inventories on the COMEX have undergone a dramatic decline in recent months as detailed here yesterday and physical delivery in London has ratcheted up since prices began tumbling on Friday, reportedly due to a sharp increase in buying from Asia.
While leveraged traders of "paper" gold in the West control the metal's price over the short term, it is buyers of the physical metal in the East that determine the price over the long term and their buying has just picked up considerably because precious metals are now on sale.
Numerous reports have already appeared on the stepped up buying now going on in Asia and the Middle East and, while they have appeared in places where futures traders don't look, they probably wouldn't care anyway since all futures traders really care about is the price.
Lately, the price has been going down, so they sell.
But, where most physical gold is bought and sold, when the price goes down they buy.
Here's a sampling of reports coming out of Asia over the weekend:
- Purchasing goes up as gold drops - Gulf News
- People jostle to buy gold - The New Indian Express
- Rush for gold in UAE as South Asians ring in the New Year - The National (UAE)
I've yet to come across any news from China about how markets are reacting to the sudden drop in metal prices there, but it's a sure bet that buying has picked up considerably. As in India, there is a cultural affinity for precious metals in China about which we know virtually nothing in the U.S. (aside from the small ranks of beleaguered gold bugs) and lower prices are seen as reasons to buy, not sell.
Given persistently high levels of inflation in India and how the Chinese look down on rampant central bank money printing in the West, lower prices could lead to sharply higher demand by both ordinary people and central banks alike. The Russian central bank has been a steady buyer of gold for some time now and they will no doubt look upon lower prices as reason to buy more.
As more metal moves to Asia, this could lead to new and interesting revelations about the extent of gold leasing that Western central banks have carried out over the years and shed light on the long-rumored "multiple ownership" of gold inventory. Recall that central banks have "lent" gold into the market for many years now in a move that some say is aimed at keeping a lid on prices. It is not known whether that is the true intent, but one thing is clear - more supply in the market means less gold in central bank vaults.
That Germany's recently announced repatriation of about 350 tonnes of gold from vaults in New York will take up to seven years has raised important questions about how much metal is really there. Recall that the Germans haven't seen their gold since before World War II and, since then, have trusted U.S. officials to keep it safe.
There is precious little publicly available data about how much gold remains in the vaults of Western central banks and whether any allegations of multiple ownership are true, but a big increase in metal moving to Asia could help answer some of these questions.
Don't look for any of this to have any immediate impact, but, someday, this vicious sell-off may be looked back upon as the time when very large amounts of physical gold began moving from the West to the East as traders of "paper" gold in futures markets marveled at the downward price action.
Additional disclosure: I also own gold coins