The recent drop in gold and silver defied the fundamentals of the market, and all logic. The price of gold tumbled on Monday and in the meantime, there has been a lot of physical buying in Asia especially in China. The scale of the gold sell-off was enormous and most of it was done on the futures market of Comex which has often been accused in being complicit with the bullion banks attempts to drive the price of gold and silver lower.
By David Levenstein
Wednesday April 17, 2013 11:41
The recent sell-off in gold and silver defies the fundamentals of the market, and all logic. The price of gold continued to tumble on Monday plunging by more than 10% to an intra-day low of $1355.10 an ounce after some aggressive selling that began on Friday afternoon forced prices to plummet to the lowest level in two years. Then, on Tuesday, there was a small rebound as some traders covered short positions while others stepped in to buy at the lower price.
In the meantime, there has been a lot of physical buying in Asia especially in China. Numerous jewellery shops in Shanghai were reported to have run out of stock and evidently, substantial demand is being seen in other regions including Japan, India, Australia, the U.S. and Europe.
While certain commentators cite a variety of factors including a proposed sale of Cypriot gold holdings, a disappointing U.S. numbers last week, and the latest release of poor economic data from China as the reasons for the smash gold prices, it is most unlikely that any of these precipitated a crash of some $200 an ounce in two days.
The scale of the sell-off was enormous and most of it was done on the futures market of Comex which has often been accused in being complicit with the bullion banks attempts to drive the price of gold and silver lower.
Evidently, on the opening of Comex last Friday, a whopping 3.4 million ounces (100 tons) of gold of the June futures contract hit the market. The seller in this instance was rumoured to have been Merrill Lynch's floor team. The massive sell order knocked out most of the bids taking gold through the technically important level of $1550 an ounce.
Then, apparently two hours later, another larger order hit the floor. This time is was for the sale of a further 10 million ounces (300 tons) over the following 30 minutes of trading. This was clearly not a case of producer hedging or the sudden liquidation of longs. The trade smacked of another concerted 'short sale' which will never be backed up by any delivery of the physical metal.
The sale of around 400 tons of gold futures selling in total equates to 15% of annual gold mine production - too much for the market to readily absorb in a few hours!
On April 16, Portfolio Manager and Senior Managing Director of the Tocqueville Asset Management L.P. John Hathaway in an interview on King World News said that the total number of paper Comex contracts sold on Friday, April 12th, and Monday, April 15th, totalled 1 million contracts, exceeding global annual gold production by 12%. “The attack succeeded when the technical support in the low $1500’s/oz. easily gave way and led to waves of forced selling. The volume is without precedent and has all the characteristics of a panic liquidation driven by naked short selling”.
As mentioned above, it is blatantly clear that the selling was not some producer hedging production and that the intention of this sale was to break certain support levels in the gold price in an attempt to create some panic selling. I guess we will never know if the sell was orchestrated by the likes of the US Fed or if it was just one huge spec play by certain bullion banks. But no matter the reason, there is something sinister behind this move.
There was also talk of the weaker-than-expected Chinese GDP growth may signal a setback for the global economy and a fall in demand for commodities. China's Q1 real GDP growth was reported at 7.7% year-on-year which was below market expectations of 8.0% and down slightly from 7.8% in Q4. China's March industrial production was up by 8.9% year-on-year which was below market expectations of 10.1%. However, it is highly unlikely that this was the catalyst to cause a $200 an ounce drop in the gold price.
Also concerns about indebted Eurozone countries selling their gold reserves to help finance their financial bailouts also spooked traders after Cyprus government officials said selling part of the countries gold reserves was an option. What scared traders was not so much the amount of gold to be sold by Cyprus as the amount of some 14 tons would not really impact on the market, but because this may be followed by other heavily indebted nations in the Eurozone such as Italy and Portugal. This action suggests that other struggling countries in the euro area may also be forced to use their gold reserves. Countries which include, Portugal, Ireland, Italy, Greece and Spain, hold more than 3,230 metric tons (3561 tons) of gold between them.
Most of this gold - 2,451.8 metric tons - belongs to Italy. But Portugal and Spain also hold hundreds of metric tons. Gold accounts for more than 90% of Portugal's foreign exchange holdings, and 72.2 % of Italy's.
While gold sales could hardly solve the Eurozone financial crisis, (Italy's entire gold reserves, for example, are worth less than 95 billion euros, against outstanding debt of around 1.685 trillion euros), judging by the Cyprus situation it shows that these countries could also be forced into selling gold to help address their severe debt problems.
But, it is unlikely that the situation in Cyprus caused this sell-off in gold.
The price of gold came under some selling pressurefollowing the release of minutes from the latest Federal Open Market Committee (FOMC) meeting. The Fed released the minutes early at 9:00 a.m. instead of the usual 2:00 p.m., after it inadvertently sent them to congressional and trade group employees the day before.
The minutes showed that some FOMC members are concerned about the long-term impact of the Fed’s $85-billion-a-month bond-buying program, known as quantitative easing. However, this is unlikely as the Fed is committed to bring the unemployment rate down to 6.5% and this is not going to occur any time soon. But, again, the Fed’s ultra-loose monetary policies do not justify the scale of this sell-off which is unprecedented.
While the potential sale of gold from Cyprus or the weaker-than-expected economic data will be mentioned as the catalysts for this massive smash in the prices of gold and silver, I suspect the truth to be something a lot different especially when there has not been one single change in the fundamentals that could have been a catalyst for the panic selling in the gold and silver markets.
Recently there are reports about large drawdowns in physical gold warehouse stocks at the Comex including a massive drawdown at the J P Morgan Chase depository. If, as a result of this, stocks are too low to meet deliveries, gold would have to be bought in the open market, driving prices sharply higher, and they for sure don’t want that now that their stocks are so low. So the game is to smash the gold price so that they can replenish their stocks at lower prices.
At the same time, and before this smash, there was talk of a shortage of gold available on the LBMA. So, it is quite feasible to conclude that this was nothing other than an organised raid to trigger stops and scare individuals out of their positions, in order to lower prices so that these bullion banks can replenish their stocks at lower prices.
Only two weeks ago, ABN AMRO, the biggest Dutch bank, has sent a letter to its clients stating that they will no longer be able to take physical deliveries of the gold they have bought through ABN. Instead they are offered money at the current market rate for gold.
Meanwhile, the Bank of Japan announced that it will double Japan’s monetary base over the next 2 years by mainly buying liquid assets such government & corporate bonds, stocks and sector funds such as the property sector. As the US Federal Reserve, ECB, BoJ and BoE, print money, the effect is the same. The effect is to inflate asset prices whilst increasing the rate of the depreciation of the currency against other fiat currencies which are also in a perpetual state of free fall as all governments are engaged in the same policies of competitive money and debt printing.
Of course printing money does not increase wealth. It creates the illusion of wealth. The more money in the system does not mean that the economy has grown or improved and instead it simply inflates the prices of those assets. By keeping interest rates low and manipulating the price of gold down, these bankers are forcing individuals into investing in equities.
The recent rise in global equities has caused a flight of money into the stock market. And, as gold has lost some of its safe-haven status individuals who are only being paid a pittance in interest are being coerced into investing their money in equities. By taking this risk they may receive a dividend that that may increase each year plus the potential of capital gains. However, these higher prices cannot be sustained without any economic growth.
So for now as these central banks have managed to push prices of equities higher and the price of gold lower, my long-term view has not changed. I sincerely believe that these financial leaders are trying to scare the individual investor out of bullion. It is an act of desperation. The central bankers are so deep in debt the only way out will be to default or debase their currencies. And, as the US dollar is still the world’s reserve currency, the Fed is trying to convince everyone that the dollar is the only the only safe haven, not gold. As the Fed continues to print huge quantities of money, other countries are abandoning the use of the dollar as international payment as their game of deception will not fool everyone.
Central banks will try anything to destroy gold as a safe haven and maintain their fiat monetary system. But, the longer the prices are suppressed the more powerful the next breakout will eventually be. The bull market in gold is not over.
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