Countdown of Manipulated Gold Price Running Out 72 comments
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So what’s wrong with gold? Why has the price not skyrocketed? Do you remember the day when Bear Stearns failed? Do you remember what happened on that day with gold? It spiked up to $1032 per ounce and marked its highest intraday price ever (in nominal price terms – remember, the inflation adjusted high would be in the $2300 per ounce range). Now in retrospect, doesn’t the Bear Stearns event look like some kindergarten party? Yes, the financial system has been under much more stress recently. What we have experienced in the last days was the biggest effort ever made to rescue the global financial system and it is still not clear if we are out of the storm. But nevertheless gold has even retreated to the $850 range. Does it looks strange or not?
In times where the entire financial system is on the edge, you would expect gold to soar because of its safe haven attributes. Obviously something is seriously wrong. Right now, we are experiencing two forces to fight with each other: the physical market and the paper market. To understand what’s going on you have to know that the paper market is the short term market and the physical market is the long term market.
The place of most attention for the paper gold market is the COMEX. The price you see in the newspaper is the price of the gold future traded on the COMEX. Unfortunately, it is a paper market which is very vulnerable for manipulation and it does not reflect the real market which takes place in physical supply and demand.
In the past, commodity producers used futures to hedge prices and in many cases physical delivery took place. Today, futures are by the majority just markets for speculators trading paper and not asking for physical delivery. Just remember what happened with oil some months ago – oil was trading at roughly $ 150/bbl and even official sources claimed that the reasons were demand and supply based – they neglected the effect from speculators and deep pocket institutional investors. Well, the high was set in July. Do you really think that demand has fallen that sharply or supply has caught up that fast since then? Maybe you remember the intraday spike in July which was responsible for the all-time-high? This was triggered by short-covering from a Texas based energy trading firm. Do you think this has something to do with demand and supply or do you think this is just a paper market movement? Yes, this is a paper market movement and for gold the price has been depressed.
Also remember, banks are not lending money to each other and they have to do whatever is possible to stay liquid. Have you ever heard of the gold carry trades? They are real and they are most likely at least responsible for a part of the paper selling pressure on gold. Central banks have loaned a portion of their gold holdings over the past years. GFMS and Virtual Metals have estimated that gold on loan position amounts to between 4000 and 5000 tons. GoldMoney believes the gold loan position is more likely to be 8000 tons to 15,000 tons, whereas Cheuvreux’s estimates central banks have lent as much as 10,000 tons to 15,000 tons of gold, which it suggests is between a third and half of the reported total of their reserves.
Banks were desperate to get cash and therefore were selling gold futures into the market – the futures were most likely covered by gold lent from central banks. I also assume that central banks were assisting in this procedure since it was another way to support the credit system. Actually, it was a very agreeable way since it was done without any public knowledge (and particularly without any media coverage) and without any immediate consequences on the monetary aggregates (at least for the short term). I can’t prove this action but there are many indications that this happened:
- Soaring gold lease rates as an indication that gold has been lent heavily and as an indication that central banks started at some point to tighten. The rising gold lease rates are also an indication that central banks weren’t willing to lend their gold at low interests any more.
- Very strong selling on the COMEX gold future particularly when risk aversion was strongest and when banks were struggling for liquidity. Last Friday, gold crashed over 7% in a day of pure panic. Would you really sell gold on such a day? Interestingly, the selling pressure started very late in the day when volume was drying-out.
- Confirmation from gold trading desks that central banks started to tighten gold lending. Obviously, they were not willing to lend their gold to a potentially insolvent counterparty at a low interest rate. Nevertheless gold lending still happened but at higher interest rates and this gold was sold into the market.
What about the long term implications of the bailout packages on gold? The possible threats are severe and will very likely lead to higher inflation. The sum of the overall bailout packages has now reached more than $4600 billion, huge isn’t it? The extremely aggressive fiscal and monetary policies now in place are ticking time bombs for inflation in the future. Right now, the world fears about deflation and inflation are not a threat. That’s true, but what happens if the official agencies now in charge are too late to tighten the monetary flood once economies are recovering? Yes, this will lead to a major inflationary backlog of potentially giant proportions.
I believe if very experienced and smart investors such as Mr Jim Rogers see inflation as a very real threat in the future, you should listen to them. You might want to watch this interview “Inflationary Holocaust” by Jim Rogers. Another interesting interview regarding the same issue and with further implications on currencies such as the dollar, euro and sterling is “Will bailouts risk hyperinflation?”
I picked up the topic of a global currency crisis in previous articles and I’m sure this will happen in the not too distant future. Remember, the value of a currency is in the long term determined by its fundamentals (and not short covering or pure safe haven buying as it happens right now in the US dollar). I expect the old economy currencies will devaluate against the currencies of the emerging countries, particularly Asian countries. They have huge amounts of money, economies with excellent long term growth potential and no hidden financial time bombs. Do you really think the US dollar is stronger or is it more likely that other currencies got weaker against the US dollar? That’s a very important difference.
The US dollar got stronger because of a giant flood of money pouring into the US treasury market. This was safe haven buying at its best. But when the storm calms, do you really think these investors feel comfortable? I don’t think so. In the mid to long term, the US dollar and the rest of the highly inflated global currencies will devalue. It’s also interesting that according to the World Gold Council, CBGA 2 signatories sold only 357 tons gold in year 4 of the agreement, well below the 500 tons ceiling. Are they running out of ammunition or did they finally understand that they'd better hold on to their gold since this is the backbone of their paper money?
So what’s going on in the gold market? Right now, we have a huge wave of paper gold coming into the market and therefore depressing the price of gold. I’m speaking about gold futures that have been sold by large unwinding transactions mainly from hedge funds which have to reduce their exposure or which are liquidated entirely. Lots of margin calls for private and institutional investors also played their part in this game.
A pretty new invention are the so called ETNs (Exchange Traded Notes) and virtually thousands of other paper products (called certificates, baskets, structured products, etc.). Do you remember the word ‘counterparty risk’? Does this ring a bell? Yes, it should. Even if you have bought an ETN or another paper based product on gold, it is not necessarily backed by physical gold, it is actually nothing else than a debenture with a payment guaranty of the issuer – a great product if the issuer is Lehman Brothers or Bear Stearns, etc. After Lehman Brothers went bankrupt, many investors found out that even their capital protected products were worthless. I strongly believe the current sell-off in commodities and also gold is a substantial part triggered by huge selling of paper products. So here we are again, the paper market vs the physical market.
The physical market is virtually exploding! Demand is so strong that you have to wait several days or even weeks before you get your physical gold (coins or bars). So how can you explain that physical demand is so incredible strong that you can’t get your coins and bars and the price of gold (remember COMEX paper market) is still falling? I can’t and this makes me think that something is seriously wrong and will eventually lead to a huge spike in the price of gold!
It is not only the physical demand that is very strong, it is also the gold ETFs which are adding up gold and just reached new record levels, but still the price of gold is falling.
There is one thing I don’t like about some of the gold ETFs. Did you know that some allow short selling? This looks like a minor issue but could have a major effect for investors who think they own a fund which is fully backed by physical gold. Maybe this is not the case: The ETF’s administrator only knows the net long position and backs this amount with physical gold.
Imagine, we have 100 long positions (from investors who want to have a fully backed gold ETF) and we have 50 short positions. Overall this means a net long position of 50 (and I guess the fund administrator only covers the net long position with physical gold). So what happens if the investors with the 100 long positions are asking for physical gold delivery? Well, there is only enough gold for 50 long positions in the ETF’s vaults. But the fund administrator has to deliver the physical gold for 100 long positions. Maybe this triggers a short squeeze in the physical gold market? I don’t like this idea and therefore I prefer holding physical gold in a vault or in an ETF which does not allow any short selling. Unfortunately, the world’s biggest gold ETF “SPDR Gold Shares” (GLD) allows short selling. I like the instrument as a vehicle to track the price of gold but I don’t like the short selling possibility.
Overall, the bull market in gold is far from over. Even though most investors don’t really understand what is going on with the price of gold. It’s like an elastic spring, the more you depress it, the higher it jumps once released. Right now, inflation is not a problem, but it might get one in the future again and this time probably even bigger than before. Besides of course other fundamental reasons to buy gold (e.g. growing jewelery demand from emerging countries, asset hedge, currency protection, etc.).
Investors should preferably buy gold stocks such as Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), AngloGold Ashanti (AU) or Harmony Gold (HMY) to gain direct exposure and leverage to a rising gold price. But nevertheless, physical gold in fully backed gold ETFs or in gold coins/bars remains a core asset besides some gold equity holdings.
Disclosure: The author is fund manager for a mining & metals fund. The opinions expressed in this article are those solely of the author.
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Uncle Sam can't touch it when the time comes for all American citizens to do their patriotic duty (lmao) by turning in their gold (google: Gold reserve act).
There's also GTU (Central Gold Trust) and it too is located in Canada and according to their mandate:
"The Deed of Trust of GoldTrust specifies that at least 90% of the assets of GoldTrust are to be invested in pure, refined gold bullion. However the policy of the Board of Trustees of GoldTrust specifies that at least 95% of the assets of GoldTrust shall be invested in gold at this time."
As an American living abroad, I have no intention of letting the manipulators get their hands on my gold when their house of cards comes crashing down.
2. In Swiss every second retail shop do not accept Euros. Not because they are copys, there are some other reasons connected with place of printing.
3. Relation between Gold and Euro is just a fairytale story,for little baby's. Explanation: More dollars in system , more the dollar gain. Nice but which really economics or either natural theory supporting such behavior.
In Bible was written 1oz of gold buying 32 pieces of bread, this simple formula suggesting to us that real price of gold should be approx 1150 usd.
1. India is the largest consumer and importer of Gold.
-Indians have been selling Gold as it made its bull run. With the INR falling against the USD the spot Gold Price in India is still quite high, and encouraging more sales.
-Indian economy is slowing down and the stock market has been cut in half; less discretionary demand for gold.
2. The world is in a deflationary asset mode. The hedge against inflation is not needed.
3. The fragile banking system has been effectively nationalized with national governments providing a back-stop. The safe-haven play is over.
4. Some talk of central banks selling Gold, partly to finance the backstop they have provided to the major banks. Many hedge funds de-leveraging and selling their gold holdings.
5. Dollar Strength; other commodities are also down.
6. Supply too is elastic with relation to price. With Gold prices near its highs, Gold producers have an incentive to mine more. Longer work-days, deeper mines.
I have also had a horrible experience with E-Trade . They get you for 7.99 per trade , a had very small margin , but in bad market , thet don't even give you the time to sell at a higher price + they want 7.99 to sell because of their margin call . I know I am no where near the ' margin limit ". Truth be known , I read quite a few months ago that E-trade had a " huge exposure ' to mortgages + were not safe . The well known commentator had moved his trading acct away from E trade . They are in trouble ! . This is why they are killing everyone !
Additionally, nearly every gold pusher weaves a slightly different yet unique tapestry they want us to see. And the most important thing to them is that WE see it.
Why do they need us so badly?
Can you imagine any other sector or commodity having every proponent so aggressively selling its merits in such long, involved testimonials?
Also, I question the merits of anything that goes down in price being a hedge against inflation.(Yes, I understand that if the whole thing falls off the cliff and there is no more currency, that gold is said to be the thing that will return to its historical place as the default currency.)
Additionally, nearly every gold pusher weaves a slightly different yet unique tapestry they want us to see. And the most important thing to them is that WE see it.
Why do they need us so badly?
Can you imagine any other sector or commodity having every proponent so aggressively selling its merits in such long, involved testimonials?
Also, I question the merits of anything that goes down in price being a hedge against inflation.(Yes, I understand that if the whole thing falls off the cliff and there is no more currency, that gold is said to be the thing that will return to its historical place as the default currency.)
My 90% Auction ends Monday, October 20th, Noon Eastern time, or 9AM, Pacific.
My 200 Engelhard 100 oz. bar auctions end Wednesday, October 22nd, 3PM Eastern time, or Noon Pacific. It's a series of 30 auctions that close a minute after each other, over 30 minutes. The last auction is for 50 bars.
My 90% Auction ends Monday, October 20th, Noon Eastern time, or 9AM, Pacific.
My 200 Engelhard 100 oz. bar auctions end Wednesday, October 22nd, 3PM Eastern time, or Noon Pacific. It's a series of 30 auctions that close a minute after each other, over 30 minutes. The last auction is for 50 bars.
-mmarc
Have you considered how easily gold coins can be diluted or forged?
1) In your Chinese / North Korean / US backyard workshop, glue two disks of carbon and lead together such that the average density of the combination is the same as gold.
2) Insert disks into coin mold, pour in $100 worth of molten gold for a thin cover. Deburr and polish.
3) Sell these coins to poor and middle class American conspiracy theorists at 500% over cost. They will pass density, magnetism, spectrometer, scratch, etc. tests and are untraceable. After all, who ever cuts a gold coin in half before buying it?
Sounds like counterparty risk to me!
Gold has now reached the point of no return in the way of an average person being able to purchase it. Just one and a half years ago the average Joe could afford to buy an ounce of Gold and now they cannot – They have switched to silver. Eventually they will not be able to buy silver due to the fact they must service all their debt and just pay for living expenses.
Inflation is just another way of saying it takes More of your dollars to buy what you need and Deflation means you don’t have enough dollars to buy what you need. The bottom line is the economy is screwed up and if we were on a gold standard and left to its own devises it would not matter as the price of something would be stable in the form of cost.
Gold and silver have always been money and always will be money and if you believe paper is worth something use the money from a Monopoly Game and use that if you think it is worth something. It is all in if you believe what is printed by some entity be it a government, company, town or person it will be until you lose faith in it.
I really do not understand the ones whom do not read history and can see for over 2000+ years Gold and Silver have always been money or medium of exchange and ALL paper currencies have failed over these same 2000+ years. They never hold up. One generation that knows what REAL money is dies off and as the government/country decides to print some paper money and get the public to use it for transactions it is then based on the faith of that generation until it fails as did the ones before it.
The saying goes “With one ounce of Gold you can buy a bus ticket to a town, buy a new suite, 3 meals for a day, a room for the night and if needed a ticket out of town And still have some change to spare.” This still holds true today and would be even more so if the paper gold and silver did not exist.
So go on do whatever – buy stocks, ETF’s, paper assets, bonds, or whatever, but when the dust settles don’t give me that hard luck saying “Buddy can you spare a Silver Dime?” Because Buddy I won’t be around – I will have already left you and the town behind.
Got Gold? Got Silver?
(Check out Jason Hommel’s Sales on silver and see what I am actually talking about.)
Undaunted by anything on why not to own physical on this thread..
Gold as well as most other commodities have been held down for quite a long time by the bankers. The world wide economic system is based on paper and the Central Bankers will lose power when commodities begin to rise. If the system is driven by paper and credit, it would not be in the interest of the bankers to have the public buying up tangible assets.
Gold and the rest of the precious metals have become the only real safe investment. I believe the current gold price is not anywhere near the price it should be at, based on inflation.
The following is an excellent article on how gold has decoupled from the US Dollar.... www.goldnewswire.net/g...