By Bud Conrad | Casey Research Chief Economist
How can we explain gold dropping into the $1,300 level in less than a week?
Here are some of the factors:
- George Soros cut his fund holdings in the biggest gold ETF by 55% in the fourth quarter of 2012.
- He was not alone: the gold holdings of GLD have contracted all year, down about 12.2% at present.
- On April 9, the FOMC minutes were leaked a day early and revealed that some members were discussing slowing the Fed $85 billion per month buying of Treasuries and MBS. If the money stimulus might not last as long as thought before, the “printing” may not cause as much dollar debasement.
- On April 10, Goldman Sachs warned that gold could go lower and lowered its target price. It even recommended getting out of gold.
- COT Reports showed a decrease in the bullishness of large speculators this year (much more on this technical point below).
- The lackluster price movement since September 2011 fatigued some speculators and trend followers.
- Cyprus was rumored to need to sell some 400 million euros’ worth of its gold to cover its bank bailouts. While small at only about 350,000 ounces, there was a fear that other weak European countries with too much debt and sizable gold holdings could be forced into the same action. Cyprus officials have denied the sale, so the question is still in debate, even though the market has already moved. Doug Casey believes that if weak European countries were forced to sell, the gold would mostly be absorbed by China and other sovereign Asian buyers, rather than flood the physical markets.
My opinion, looking at the list of items above, is that they are not big enough by themselves to have created such a large disruption in the gold market.
The Paper Gold Market
The paper gold market is best embodied in the futures exchanges. The prices we see quoted all day long moving up and down are taken from the latest trades of futures contracts. The CME (the old Chicago Mercantile Exchange) has a large flow of orders and provides the public with an indication of the price of gold.
The futures markets are special because very little physical commodity is exchanged; most of the trading is between buyers taking long positions against sellers taking short positions, with most contracts liquidated before final settlement and delivery. These contracts require very small amounts of margin – as little as 5% of the value of the commodity – to gain potentially large swings in the outcome of profit or loss. Thus, futures markets appear to be a speculator’s paradise. But the statistics show just the opposite: 90% of traders lose their shirts. The other 10% take all the profits from the losers. More on this below.
On April 13, there were big sell orders of 400 tonnes that moved the futures market lower. Once the futures market makes a big move like that, stops can be triggered, causing it to move even more on its own. It can become a panic, where markets react more to fear than fundamentals.
Having traded in futures for over two decades, I want to provide some detail on how these leveraged markets operate. It’s important to understand that the structure of the futures market allows brokers to sell positions if fluctuations cause customers to exceed their margin limits and they don’t immediately deposit more money to restore their margins. When a position goes against a trader, brokers can demand that funds be deposited within 24 hours (or even sooner at the broker’s discretion). If the funds don’t appear, the broker can sell the position and liquidate the speculator’s account. This structure can force prices to fall more than would be indicated by supply and demand fundamentals.
When I first signed up to trade futures, I was appalled at the powers the broker wrote into the contract, which included them having the power to immediately liquidate my positions at their discretion. I was also surprised at how little screening they did to ensure that I was good for whatever positions I put in place, considering the high levels of leverage they allowed me. Let me tell you that I had many cases where I was told to put up more margin or lose my positions. Those times resulted in me selling at the worst level because the market had gone against me.
The point of this is that once a market moves dramatically, there are usually stops taken out, positions liquidated, margin calls issued, and little guys like me get taken to the cleaners. Debates rage about the structure of the futures market, but my personal opinion is that a big hammer to the market by a well-heeled big player can force liquidations, increase losses, and push the momentum of the market much lower than the initial impetus would have. Thus, after a huge impact like we saw on April 13, the market will continue with enough momentum that a well-timed exit of a huge set of short positions can provide profits to the well-heeled market mover.
Moving from theory to practice, one of the most important things to keep your eye on is the Commitment of Traders (COT) report, which is issued every Friday. It details the long and the short positions of three categories of traders. The first category is called “commercials.” They are dealers in the physical precious metals – for example, gold miners. The second category is called “non-commercials.” They include hedge funds and large commercial banks like JP Morgan. Non-commercials are sometimes called “large speculators.” The rest are the small traders, called “non-reporting” since they are not required to identify themselves. The ones to watch are the large speculators (non-commercials), as they tend to move with the direction of the market. Individual entities could be long or short, but in combination the net position of the group is a key indicator.
The following chart shows the price of gold as a blue line at the top, and the next panel down shows the net position of these large speculators as a black line. You can see that over the long term, they move together. When the net speculative position is above zero, this group is betting on rising gold prices. Of course, the reverse is true when it’s below zero. In this 20-year view, the large speculators were holding net negative positions during the lowest point of the gold price, around the year 2000. As the price of gold rose, their positions went net long, and they profited.
An interesting thing about the chart above is that the increasing amount of net longs reversed itself before gold peaked in 2011, suggesting that these large speculators became slightly less bullish all the way back in 2010. The balance remains net long, but it remains to be seen how long that lasts.
What is not so obvious is that these large speculators are so big that they can affect the market as well as profit from it; when they initiate massive positions in a bull market, they drive the price of the futures contracts even higher. Similarly, when they remove their positions or actually go short, they can push the market lower.
So what happened a week ago was that a massive order to sell 400 tons of gold all at once hit the market. Within minutes the price plummeted, and over a two-day period resulted in the largest drop of the price for futures delivery of gold in 33 years: down $200 per ounce.
We don’t have the name of the entity that did this. However, the way the gold was sold all at once suggests that the goal was not to get the best price. An investor with a position of this size should have been smart enough to use sensible trading tactics, issuing much smaller sell orders over a period of time. This would avoid swamping the market; and some of the orders would be filled at higher prices and thus generate more profit. Placing a sell order big enough to affect the overall market price suggests that someone with powerful backing wanted to drive the price of gold down.
Such an entity could have been a large speculator who already had a sizable short position and could gain by unloading some of its short position once the market momentum had driven the price even yet lower. Or it could be a central bank – one that might be happy to have the gold price move lower, as it would provide cover for its printing of more new money. Of course, it could be some entity that owned long contracts and wanted to get out of the position all at once. We don’t know, but this kind of activity, resulting in the biggest drop in 30 years, raises more than just suspicion when we consider how important the price of gold is to many markets around the globe.
Can markets really be influenced by big players? Well, was the LIBOR rate accurately reported by huge banks? Have players ever tried to corner markets? The answer to all the above, unfortunately, is yes.
There’s an even bigger problem with the legal structure of the futures market: even the segregated funds on deposit can be pilfered by the broker for the brokerage’s other obligations. That is what happened to MF Global customers under Mr. Corzine. (I had an account with a predecessor company called Man Financial – the “MF” in the name. I also had an account with Refco, which is now defunct. Fortunately, the daggers did not hit my account, since I was not a holder when the catastrophes occurred.) My take: the futures market is dangerous, and not a place for beginners.
One last note: after the Bankruptcy Act of 2005, the regulations support the brokers, not the investors, when there are questions of legality about losses in individual investment accounts. Casey Research will be producing a report with much more detail on this subject in the near future.
So, what now? We aren’t going to see a secret memo – no smoking gun to confirm that what happened on April 13 was an attempt to affect the market. Still, the evidence is suspicious. When big entities can gain from putting on big positions, the incentives are big enough for them to try – LIBOR, Plunge Protection Team, Whale Trade, etc., all support this view.
The Physical Gold Market
Previously, there was little difference between the physical and paper markets for gold. Yes, there were premiums and delivery charges, but everybody regarded the futures market as the base quote. I believe this is changing; people don’t trust the paper market as they used to.
Instead of capitulating to fear of greater losses, the demand for physical gold has hit new records. The US Mint sold a record 63,500 ounces – a whopping 2 tonnes – of gold on April 17 alone, bringing the total sales for the month to 147,000 ounces; that’s more than the previous two months combined. Indian markets, which are more oriented to physical metal, now have a premium of US$150 over the futures price in Chicago. Demand at coin dealers has increased as the price has dropped. And premiums are much bigger than they were as recently as a week ago.
Here is a vendor page that quotes purchase prices and calculates the premiums on an ongoing basis. It shows premiums of 50% and more in many cases. On eBay, prices for one-ounce silver coins are $33 to $35, where the futures price is quoted as $23. A look on Friday April 19 showsone vendor out of stock on most items:
|Buy – Sell On Silver Bullion|
|2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles - Brand New Coins||
500 Coin Min.
(1 Sealed Box)
Spot + $1.80
|2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles “San Francisco Mint” Brand New Coins||
500 Coin Min.
(1 Sealed Box)
Spot + $2.00
|90% Silver Coin Bags (Our Choice Dimes Or Quarters) $1,000 Face Value Figured at 715 Ozs Per $1,000 Face||
We Buy @
Spot + $1.70
Per Oz (Spot
+ $1.70 X 715)
Spot + $4.99 Per Oz
(Spot + $4.99 X 715)
|90% Silver Coin Bags 50¢ Half Dollars $1,000 Face Value We Ship in 2 $500 Face Bags||
We Buy @
Spot + $1.90
Per Oz (Spot
+ $1.90 X 715)
|90% Silver Coin Bags Walking Liberty Half Dollars $1,000 Face Value We Ship in 2 $500 Face Bags||
We Buy @
Spot + $2.10 Per Oz (Spot
+ $2.10 X 715)
|Amark 1 Oz. Silver Rounds ( Made By Sunshine ) Pure .999 BU||
500 Coin Min.
Clearly, the physical gold market today is sending different signals than the paper market.
The Case for Gold Is Still with Us
The long-term fundamental reasons to hold gold are undeniably still with us. The central banks of the world are acting in concert in “currency wars” or “the race to debase.” As they print more money, the purchasing power of each unit declines. They are caught between the rock of having to keep interest rates low to support their governments’ huge deficits and the hard place of the long-term effect of diluting their currency. If rates rise, even First World governments will be forced to pay higher interest fees, leading to loss of confidence in their ability to pay back their debt, which will bring on a sovereign debt crisis like what we have seen in the PIIGS or Argentina recently.
The following chart shows the rapid growth in the balance sheets as a ratio to GDP for the three largest central banks. I’ve extrapolated the expected growth into the future based on the rate at which they propose to buy up assets. One could argue about how long these growth rates will continue, but the incentives are all there for all central banks to bail out their governments and their commercial banks. I fully expect the printing game to continue to provide the fuel for hard-asset investments like gold and silver to increase in price in the years to come.
(Click on image to enlarge)
Buying Opportunity or Time to Flee?
So what does it all mean? The paper price of gold crashed to $1,325 in the wake of this huge trade. It is now hovering around $1,400. My first reaction is to suggest that this is only an aberration, and that the fundamentals of the depreciating value of paper currencies will eventually take the price of gold much higher, making it a buying opportunity. But what I can’t predict is whether big players might again deliver short-term downturns to the market. The momentum in the futures market can make swings surprisingly larger than the fundamentals of currency valuation would suggest.
Traders will be looking for a significant turnaround to the upside in price before entering long positions. However, a long-term, fundamentals-based trader has to look at the low price as a buying opportunity. I can’t prove it, but I think the fundamentals will drive the long-term market more than these short-term events. The fight between pricing from the physical market for bullion and that from the “paper market” of futures is showing signs of discrimination and disagreement, as the physical market is booming, while prices set by futures are seemingly pressured to go nowhere.
In short, I think this is a strong buying opportunity.
We also advocate stashing a good chunk of your gold outside your home country. In fact, international diversification of all your wealth should be at the top of your to-do list this year. To help you get started, at 2 p.m. EDT on April 30, Casey Research is premiering a free web video event, Internationalizing Your Assets. It features some of the world’s top experts on internationalization, including Casey Research Chairman Doug Casey, Euro Pacific Capital CEO Peter Schiff, and World Money Analyst Editor Kevin Brekke. Together they will reveal how they personally protect their assets abroad – and how you can, too. Registration is free.
Gold & Silver Crash
And here’s a cut & paste from Franklin Sanders’ email commentary (sorry no links as the-moneychanger.com site was down at time of posting)
I’m writing Tuesday morning. In the 33 years I’ve been brokering silver & gold, there are five words I have never before yesterday heard from wholesalers: “We’re not selling silver today.” At least one major West coast retailer was not selling gold yesterday, and wholesalers well selling “as long as we can get it.”
See how thin the physical silver & gold markets really are? By thin is mean that there is very little product in the pipeline. Wholesalers won’t take any chances.
The market is backwardated, but the backwardation shows more in availability than in price. A “backwardation” occurs when the price of metals for immediate delivery climbs above the price for future delivery. Normally, the interest and storage cost of carrying metal for future delivery makes futures prices higher, so a backwardation reveals demand for immediate delivery greater than anyone can meet. In this case, you can’t buy at ANY price.
It would be easy to draw the WRONG conclusion from the crash in silver & gold, namely, that the bull market has ended & Happy Money Pumping Days Are Here Again. Well, stop the band and think: if that were so, why did the Establishment need to crash silver & gold? Why make such a concerted effort — SocGen & Deutsche Bank & Goldman Sachs downgrades & FOMC minutes leaked and all the rest — to knock down silver & gold?
Because they’re worried.
Ask yourself this question: if the US had the gold it claims, why did it tell the Germans, when they asked for their gold stored in the US, it would take seven years to return it?
Why? Bureaucratic maze? No airplanes to carry it? Why?
Why did the powers that be need to crash silver & gold? Why?
Go back to the touchstone of fundamentals, the reasons we began buying silver & gold in the first place. Ask if they have changed.
CENTRAL BANKING. Central banks & their fractional reserve banks create money out of thin air: INFLATION. Inflation makes money cheap, which causes bad investments & blows up bubbles, bubbles burst, panic ensure, they paper it over with more Liquidity & more Blarney, & they run the cycle again, stripping all you victims of your capital. Success begets excess.
Has the system changed? Has the monstrous, unimaginable debt burden been removed or written off? Or have they kept on papering it over with Quantitative Easing this & Stimulus that, blowing up another bubble in stocks?
MONETARY DEMAND, the demand for safety from this system, drives all silver & gold bull markets, & nothing else. Until the system changes — and never mind the bloody raids the Establishment makes on silver & gold — silver & gold will continue to rise.
THE BULL MARKET HAS NOT ENDED. SILVER & GOLD HAVE NOT TOPPED. The cause has not changed, the effect will not change.
I laugh at people worried about government confiscating their gold and silver. Why would they go to all the trouble to send out their thugs to collect it when all they have to do is manipulae the market down and people WILLINGLY turn in their silver & gold, at bargain prices. Why force them when you can trick them so easily?
The Establishment played this same trick in 1974-1976, driving gold down 47% immediately after ownership was “legalized.” They did this in 2006, and I’m pretty sure they did it in 2008.
If the bull market has ended, why will no wholesalers sell silver? Why do retailers refuse to sell gold? Why does US 90% silver coin cost $3.50 over melt?
Yes, silver & gold have been wounded. Yes, it will take some time to recover, but ask yourself this: If you lived in Cyprus, would you rather have (a) electronic euros in a bank that you cannot withdraw, or (b) silver & gold in your hands, even though 20% lower than last week?
The Establishment’s goal is to slowly pick your bones clean. Their chief means of bringing you into powerless serfdom is inflation & debt. Their system is breaking down, & silver & gold offer you a key to unlock your chains.
Do I understand the pain of market collapses? As keenly as every one of you, but I keep my eyes on the horizon. That’s the only way you can prevent yourself being fooled, to your own destruction.
Argentum et aurum comparanda sunt —
Silver and gold must be bought.
— Franklin Sanders, The Moneychanger
BitCoin Crash & the emergence of a new asset class
Dr. Paul Craig Roberts, assistant secretary of the treasury in the Reagan administration explains the current price action of gold & silver to KWN
- Federal Reserve’s hand behind the current price take down
- Why and how the dollar is being defended
- Don’t be surprised with further declines
- Dollar exclusion zone (major economies avoiding USD as currency for trade settlements)
By Bill Downey | GoldTrends
There’s been a recent huge draw down of physical gold at the New York COMEX and at the JP Morgan Chase depository. Look at the physical market draw down on the charts below. It has taken a drastic plunge.HOUSTON — we have a problem.
Physical inventory drawdown at JPM
Charts by Nick Laird of www.sharelynx.com
You can imagine the dilemma this is causing for the market interests behind these inventories. If the inventory runs out and one cannot meet deliveries then it has to be bought on the open market. Not only that but it could cause a run up in prices that would hurt the shorts in the market.
So what to do?
There is only one way out of this for the market controllers would be to devise a plan that would collapse the market and trip up all the stops at the correction lows in gold of 1525 thereby setting off the stop loss orders under this important market low. And what if the plan included a way to stop the physical market from purchasing gold under 1525 while that correction was underway?
And how can that happen?
They have to hatch out a plan and carefully orchestrate it in a series of events that takes the gold market by surprise and force the players out of their positions.
Read on for today’s lesson in market manipulation and allow me to relay my speculation about what transpired last week.
A successful ambush usually involves surprise.
One of the main new weapons in the FEDS arsenal is TRANSPARENCY.
After a lifetime of silence the FED all of a sudden has come out of the closet and has decided that the best thing for the market is to be transparent and to that end they now have televised communication meetings with the general public so chairman Bernanke can explain the FED policy and answer any questions that the market has on its mind as well as the usual minutes that get released to the markets that review the policy decisions and discussion of prior meetings.
Why does the Fed need to explain what they are doing now?
Well it isn’t because everything is going just fine. Put it this way. They must figure when you have 50 million people on food stamps and the Dow Jones is going up a few hundred points a week and making all time highs and you have 16 trillion dollars in debt and interest rates are zero, its best to have a communiqué every month before someone asks you to explain what is going on. It’s called staying ahead of the curve if you will. If you tell them what’s going on it makes it look like you know what you’re doing. Otherwise all we have is the statistics and by themselves they tell you something is wrong, something is terribly wrong. So they have become transparent.
During the last communiqué the chairman made it abundantly clear that QE was here to stay until the unemployment rate reached acceptable levels. This communiqué whether by personal appearance or by releasing the FOMC minutes of the prior meeting is something the FED relies on so market participants can remain comfortable and abreast of Fed monetary policy.
Three strikes and you’re out
The FOMC minutes from the last meeting were due for release during last week. But a funny thing happened. They got released EARLIER than expected. It was all a big mistake and the FED let the SEC and the CFTC know right away that the error had occurred. And lo and behold even with all its transparency there happened to be some language we didn’t get updated on until the FOMC minutes were released. The notes say that several members have been discussing cutting back on the stimulus. That was strike one. It got the gold market thinking that stimulus cuts might be coming.
Surprise number two
Then a bombshell was released from news sources. It was reported that Cyprus would have to sell 400 million Euro’s of gold as part of the bailout package of raising money for their failed banking system. Gold prices came down to 1550 on the news and the day passed by. Even though Cyprus bankers tell us the next day that they didn’t discuss selling any gold, market jitters seemed to remain and Friday was just around the corner. This was strike two.
Now we need a strike three and you’re out. Gold is a nervous market to begin with as a lot of people have already lost a lot of money in the last six months.
With Gold at 1550, all that is needed for the market to drop is to get one more push where all the stops are (just below the 2 year low of 1525).
The selling began in the Friday sessions overseas. By time we got to the New York COMEX gold open, the price was down to 1542. Now all the players are there and the volume and liquidity is there to create the final blow to the market.
And then the attack began. Wave after wave of selling until gold got to 1525. Then they break down the price below the two year low and all the stops that have been accumulating there start getting tripped up and the selling accelerates as it begins to feed on itself. The physical market for gold sees this as a gift and gets ready to make their move and buy up the gold.
Now comes the part that is pure genius or a total coincidental thing that just so happens to be a gift to those who are short the market and those who would be responsible to deliver gold should the inventory deplete.
ALL OF A SUDDEN THE LONDON PHYSICAL PLATFORM THAT BUYS AND SELLS PHYSICAL GOLD GETS LOCKED UP. THE SYSTEM FREEZES.
The screens all freeze.
What does that mean?
No one can get to the physical market to buy at these low prices but at the same time, they can’t sell or protect their position either. The system is frozen. Yes, just like at Bit-coin. The system locks up. And of course the results are going to be the same, just on a lower percentage level.
What can the physical holders do?
Meanwhile the futures market continues to drop.
So what happens? The physical market holders begin to panic. How can they protect themselves as they can’t sell either?
What would I do if I were in that situation?
There is only one solution, especially during a panic. Short and ask questions later.
Therefore it is my speculation that based on 350,000 contracts sold on Friday and the massive drop, some of those contracts was the physical market having no choice but to enter into the futures markets and in order to hedge their physical position holdings, sell contracts or short the market. It’s either that or wait until Monday and be subject to potentially heavy losses should margin calls go out over the weekend. With no time to think and survival instinct kicking in, the physical holders most likely did what they could to protect themselves. They went in and shorted the futures market.
From there the market goes into a free fall as the physical market can’t buy at these low prices because the computer system is down; they can only sell futures to hedge their long physical holdings and so they do what they have to and begin selling futures.
Now it gets worse. As the price drops even more, underfunded players are getting wiped out and now they begin to liquidate. The market goes into a total collapse as all the stops below 1500 get tripped up and the market tanks to 1490.
The market finally closes in New York and returns to the 1500 area.
But it’s not over. There’s another situation going on. The weekend is arriving and players begin wondering about margin calls? How are holders going to get money to their brokers over the weekend for the Monday trade session?
But there is not enough liquidity as the COMEX has closed and only the aftermarket GLOBEX is there to execute trades.
But guess what folks?
The banks and brokers are open all weekend and as long as it takes to go through all the accounts and issue all the MARGIN calls.
If they get the margin calls out by Saturday, the customers have 24 hours to get more money to their brokers. If the money is not received by Sunday night or Monday morning, the positions will have to be liquidated, just when the market is at its lowest liquidity and the longs have had all weekend to think about it and the media has had time to tell everyone that the bull market in gold is over.
Not only that but the shorts know exactly what is about to transpire.
I hope you got the picture on how the control boyz forced a major sell off. I speculate the panic over low gold inventory had someone hatch a plan to save their accounts and a lot that is at stake.
They started with leaked information with explosive potential changes in USA policy, and then they published information that Europe/Cyprus would have to sell 400 million Euro’s of physical gold. Finally once the sell off began the physical gold market platform in London locks up and no one has buy or sell access in the physical spot market.
As the market players begin to work this out in their mind there is only one thing left to do. Try and exit and get out in the Globex market. So the selling begins again. The market hits below 1500 and then 1490 get broken. The market sells as much as it can up until the very last minute of trade at 5PM New York time. Even then it’s not over. For some reason the volume and the price keeps moving. Was there special consideration going on for those connected who wanted out? I don’t know. But at 5:07 PM Eastern standard time the market closes at 352,248 contracts and a price of 1476.10 down a whopping 5.67% -88.80 dollars.
Did the control boys lock down the physical market platform or was it pure coincidence? Either way they have total plausible deniability. HOW?
The computer system went down. It couldn’t handle the traffic and it shut down or a glitch happened in the server. It can be any one of many reasons.
This exact same thing happened during the last take down of gold in late December 2011.
VOILA. The perfect excuse and the perfect scenario.
The physical markets couldn’t buy at those low prices.
Let me repeat that. The physical markets couldn’t buy. They could only sell futures to hedge their physical gold positions.
Of course this will all be reported on the news and in the financials right?
None of it will be reported as none of it was reported on Dec 29th, 2011 when the control boyz did the same thing and locked out the computer and left the physical market holding the bag. Not one word hit the papers.
Most people are not even aware that the physical market is run by computers. They have never considered or thought about how the physical market works and executes. Guess what folks? It works the same way as Futures via computers and programs.
How do you think it works? Did you think that people show up with all their gold at an auction house and buying and bidding goes on with a mediator who can speak two hundred words a minute and gold is auctioned off like rugs or art?
No it runs off a computer system.
How do I know all of this happened today?
Because I was in direct contact with a big physical dealer out of the mid-east as it was happening. They have taken the time to explain the physical market and how they get SHUT out of the game — just like they did during the last panic (and physical shortage) in Dec of 2011.
Here is the screen shot of the actual physical market in action from January 4th 2012 that the physical trader sent me.
That completes our lesson for today on how to force a major sell off. You start the ball rolling with disinformation and early leaks and surprise with potential policy change considerations at the Federal Reserve level and you follow it up with a potential huge gold supply story that could come to the market.
You’ve shaken up the market and the selling begins and gets to within 20 dollars of two year lows where all the stops are and then you bring it down to where all the stops start getting tripped up and you just sit back and watch the market do the rest. Finally, you shut off the physical system and stop gold buying and at the same time you force physical dealers to sell the futures to hedge themselves.There’s even a term for this in the trading world. It’s called “Beat the Beehive.” You smash the nest and then watch the total confusion feed on itself. By the next day all the bees are gone and all that’s left is a smashed up beehive.
There has been a lot of speculation on the markets and manipulation that is going on. What I’ve offered in this report using the fact that gold crashed on Friday is a scenario on how it could have been orchestrated. I leave it to the reader to pass judgment on the potential.
At 8:33 AM Friday morning with gold just beginning to trade, GoldTrends listed a potential for $1490 on twitter if $1525 was taken out. Here is the chart of the COMEX session. Note the low. That blue channel line was what we based our projection potential on. The rest as they say is history.
For the short term, read the full report at Goldrends
For the long term, consider the big picture below
Outlook 2013 – The Irreversible Trends Driving Gold to $10,000
by Nick Barisheff
The long-term “irreversible” trends I’ve discussed in detail in my upcoming book, $10,000 Gold, continue to develop. Many of the trends, such as debt creation and the movement away from the U.S. dollar, are accelerating and their consequences are appearing globally. Today we will interpret how these developments will likely affect the price of gold over the coming year and beyond.
Perhaps the most prevalent indication that something is amiss with the world’s economy is a sense of malaise that many have been experiencing–a distrust in the financial system and the government. A U.S. Gallup poll, completed at the end of November 2012, found politicians to be the second least trusted individuals in society next to car salespeople. Sharing bottom marks were bankers, journalists, business executives, state governors and insurance salespeople. By contrast, nurses were the most trusted.
This level of distrust is global. Ask any Greek what he or she thinks of bankers and politicians who, through their complex bond deals, have destroyed the country’s economy. Ask the people of Iceland, who ignored the bankers’ demands for more money and instead threw them in jail. Such distrust is a tangible indication that the 41-year-old experiment in a global fiat currency system is failing.
At this stage, it is no surprise to see that those who benefited from this system are stepping up their PR campaign. Their goal is to bolster trust in paper currencies. Such campaigns are broad-based. As James Rickards, author of Currency Wars pointed out, the world is in the midst of an economic war between countries, currencies and gold. Developing countries are challenging the U.S. dollar’s de facto reserve currency status, and many in the East are turning to physical gold. The Western financial media insists on supporting the status quo with their positive messages of imminent economic recovery, but many are not buying it and the global appetite for physical gold is the best indication of this.
It should come as no surprise that the U.S. petrodollar is facing challenges. Reserve currencies go through cycles that last about a century as can be seen from the reserve currency chart. They usually end when the country that has this exalted privilege creates too much currency and goes too deeply into debt, just as the United States is demonstrating.
As in any war, “Truth is the first casualty,” but how do we distill the truth from so much complex and contradictory financial information? The answer is simple: by changing perspective; by using gold as our measure for financial assessment. The gold vantage point is more comprehensive. It allows us to see the hidden influences of inflation, for example. It helps us to understand why governments are doing what they are doing, despite their words to the contrary.
The fiat experiment officially began on August 15, 1971, the day President Nixon broke the U.S. dollar’s final international peg to gold. This allowed governments to create unrestricted amounts of currency with none of the safeguards that gold backing otherwise demanded. Consequently, the debt is now so large it is impossible to pay back. In the words of Congressman Ron Paul, the United States is “technically bankrupt.”
So let’s start by looking at the most important influence on the price of gold–global government debt.
Government debt creation through currency debasement causes paper currencies to lose purchasing power against the more stable economic standard of gold. In fact, there is a direct relationship between debt and the price of gold. The Relationship to Gold and U.S. Debt chart, which was the centerpiece of last year’s Outlook for Gold, shows the gold price rising in near lockstep with rising U.S. debt over the past decade.
The increase in central bank assets is a good indicator of how this debt is growing.
Between 2007 and 2012 Bank of England reserves increased by 362 percent, and the U.S. Fed’s increased by 223 percent. Unfortunately, as the people of Greece have discovered, most of the bailout cash stays in the hands of banks, even though the taxpayer is expected to repay the lenders.
Although all the major currencies have lost purchasing power against gold, the chart shows the dramatic demise of the U.S. dollar. Being the world’s de facto reserve currency, it is by far the largest and most important, and the reason we give so much attention to the financial health of our southern neighbour.
We can see that while backed with gold the dollar maintained purchasing power. In 1934 it lost its domestic peg to gold and then, in 1971, its international peg. The dollar has now lost 98 percent of its purchasing power since 1934.
U.S. federal debt is now growing exponentially. In his first term, President Obama added more debt than was added since the United States declared its independence from Britain in 1776. Another milestone: In Obama’s first term, the U.S. debt to GDP ratio passed 100 percent. At the present time, U.S. national debt is $16.4 trillion and GDP is $15.5 trillion. Interest payments on the debt were $454 billion in 2011. The U.S. Treasury “balance sheet” does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations.
The actual liabilities of the federal government–including Social Security, Medicare, and federal employees’ future retirement benefits–already exceed $86.8 trillion, or 550 percent of GDP. These figures are kept from the public eye and are not listed on official balance sheets. They can be found in obscure documents like the annual Medicare Trustees’ report. Some estimates put total U.S. unfunded liabilities at well over $200 trillion. In 1984, in what might have been the last serious attempt of the U.S. government to address the problem of the rising debt, President Reagan’s Grace Commission report stated that:
With two-thirds of everyone’s personal income taxes wasted ((on government excess)) or not collected (because of underground economy)), 100 percent of what is collected is absorbed solely by interest on the Federal debt and by Federal Government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from their Government.
It is safe to say that most of what this 1984 report warned against–that trillion-dollar federal debts would become reality if action was not taken immediately–has become reality.
Political Options to Counter Debt
To address the issue of runaway debt, politicians have five choices:
- Growth through productivity and exports
- Print more currency
- Financial repression
One: Grow out of it through increased productivity and increased exports. This is highly unlikely, as Western economies, and even China, are poised for recession.
Two: Introduce strict austerity measures to reduce spending. This has the unwanted short-term effect of increased unemployment, lower tax revenues and reduced GDP, resulting in even higher deficits. And the voting public hates it. The U.S. government has shown no willingness to take this path.
Three: Default on the debt. This will make it difficult to raise future bond issues at any reasonable level of interest rates.
Four: Issue even more debt, and have the central bank in question simply create whatever amount of currency is required.
Five: Follow a program of “financial repression.” The four main pillars of financial repression are:
- Negative real interest rates and interest rate caps through suppression of CPI
- Nationalization of industry
- Strict government control over investment criteria, capital controls and lending practices
- Currency debasement through unrestricted debt creation
Obviously, governments around the world have chosen to fight this currency war and their ballooning debt with options four and five. The fiscal cliff fiasco of December 2012 proved that the majority of U.S. politicians will not risk their careers by implementing the more direct, more responsible option two or three.
Financial Repression and Negative Real Interest Rates
This is a topic for a more in-depth presentation, but as 2012 confirmed, financial repression has become the unmistakable policy of governments worldwide. We will be hearing much more about this policy over the coming years. According to Bridgewater, the frequency of protests, strikes, and social unrest increases sharply as soon as annual public spending is cut by more than 3 percent of GDP. This unrest is appearing globally.
In Greece, where the government has attempted to implement austerity measures, there is 20 percent unemployment in the 30 to 50 age group, and 58 percent youth unemployment. Greece’s homeless rate has risen 25 percent since 2009, with 20,000 people living in the streets of Athens. Suicide rates, violent crime and HIV infections are all rising quickly. This is what happens when society begins to break down because of debt.
Youth unemployment is exceptionally high in most countries, especially the United States, which further burdens its young people with crippling student loans. Rising crime rates are another symptom of the increased stress currency devaluation causes. This chart on Social Trends Incarceration of Inmates since the removal of gold we can see the rapid rise in crime since 1971.
Despite the government job reports that put unemployment at 7.8 percent, those who have stopped looking for work after years of failing go uncounted. As soon as unemployment benefits run out, a job seeker is no longer registered as unemployed by the official figures.
We can see that the job participation in the United States is plummeting, due in large part to the aging population and outsourcing.
When we take into account the lack of participation, as the Shadow Stats figures show, we see real unemployment in the U.S. is over 20 percent.
Financial repression involves restrictions on bank lending practices, which dries up available financing and stifles economic growth and development. This is a subtle form of nationalization, as it discourages investment abroad. A more obvious form of nationalization comes as restrictive trade laws. One example is the U.S.’s Foreign Account Tax Compliance Act (FATCA), enacted in 2012 with the cooperation of fifty countries. This makes it much more difficult for Americans to hold investment funds based outside of the United States.
Larger government and further nationalization of industry are aspects of financial repression policy. In the United States, distressed financial institutions, automakers and healthcare are coming under the control of government, especially under the Obama presidency. Most of the new jobs created are government jobs, with five hundred thousand U.S. government employees making over $100,000 per year (twice that of the average U.S. workers’ salary).
Financial repression is becoming a global policy as the currency war amongst countries like China, Russia and the United States accelerates. China has been using financial repression since 2000, with official inflation pegged at 0.72 percent from 2002 to 2009. This creates negative real interest rates of -7.2 percent, which gives China some of the lowest real interest rates in the world and explains why it is such a large gold buyer. Negative real interest rates can be determined by subtracting real inflation from official inflation or Real Interest Rate = Nominal Interest Rate – Inflation (Expected or Actual).
There is a direct correlation between gold buying and negative real interest rates that are encouraged by financial repression. Negative real interest rates, despite governments’ incessant promises of economic recovery, will likely be with us for years to come. This policy rewards borrowers, but punishes savers.
Currency debasement, which results from creating too much currency and is one of the elements of financial repression, is surreptitious in that the public is less aware of the damage. Inflation caused by currency creation is the “hidden tax”. Everyone who eats, drives, heats their home or sends their children to college is aware that life is becoming more costly by the day. Yet government continues to issue inflation figures that show the cost of living is stable. They have achieved this deception since the days of Bill Clinton through “creative” accounting, such as removing food and energy from the “basket of goods” used to measure inflation and the CPI. Before 1995, the CPI measured a “fixed standard of living” with a fixed basket of goods. Today it measures the cost of living with a constantly changing basket of goods, measured with metrics that are themselves constantly changing.
Fortunately, economist John Williams of ShadowStats.com keeps track of the original basket and his figures show inflation at a more realistic level.
Movement away from petrodollar
Last year saw several important BRICS and ASEAN agreements that exclude the U.S. dollar. In March 2012, Brazil, Russia, India, China and South Africa (BRICS) agreed to development banks that will allow these countries to trade amongst themselves without using U.S. dollars.
In 2012, China also signed important trade agreements with Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand, Vietnam and the Philippines, which are members of the ASEAN alliance. They will trade in yuan rather than U.S. dollars.
China and India are rumoured to be circumventing Iranian trade sanctions by trading gold for Iranian oil.
The foreign appetite for U.S. Treasuries is also waning and the Fed is subsequently being forced to buy United States’ debt. It is expected to buy up to 90 percent of new debt created in 2013. This situation creates restriction on available Treasuries, which will continue to push down absolute yields. The developing world has had enough of the U.S. economic domination that has been in force since the 1944 Bretton Woods agreement. OPEC’s backing of the U.S. dollar in 1973, which required oil to be traded only in U.S. dollars, stopped the greenback’s rapid slide that began when the gold peg was removed two years earlier. As the developing world continues to find ways around this petrodollar arrangement, the U.S. dollar will find itself in serious trouble as its weak fundamentals, rather than its reserve currency status, are used for valuation.
The Federal Reserve currently holds about 18 percent of the U.S. GDP on its books, a number that could bulge to 28 percent a few years out depending on the continuation of or increase in current programs, and growing distrust in U.S. fiscal responsibility.
Increased Preference for Physical Gold over Paper Gold
Private investors are pulling out of the markets and are even showing distrust in gold proxies such as gold shares and ETF shares in favour of the most trusted asset–physical bullion.
By one estimate, physical demand will likely exceed ETF demand by five times. This is almost a complete reversal from a few years ago, when ETFs accounted for 80 percent of demand.
“Backwardation” occurred in the gold price in 2012, which means the physical price exceeds the futures price. This indicates a stronger interest in physical over paper gold. Backwardation is a rare event in gold, as physical gold is one of the most liquid forms of money. Much of the world’s gold still exists and is available at the right price.
Last year, 2012, began with slow gold coin sales; however, November saw the greatest volume in fourteen years, probably influenced heavily by Obama’s election, which guaranteed more spending and more debt.
Central Banks are Buying Gold
Perhaps the most significant consequence of runaway debt is that central banks have been net buyers of gold for the past three years, beginning in 2009. According to GFMS, in 2012, net official sector gold purchases totalled 536 metric tons. This is up 17.4 percent on the year.
These figures do not include China’s central bank buying, which in the past occurred secretly through Chinese sovereign wealth funds that do not require the same degree of transparency central banks do. We know that China, as a country, bought more gold by August than the European Central Bank’s (ECB) entire 501 tonnes of holdings.
This past year saw significant central bank buying from countries like Brazil, Iraq, Mexico, Thailand, South Korea and the Philippines, as well as by established buyers like Turkey, China, India and Russia. In fact, central banks bought more gold in 2012 than they have since 1964.
German Repatriation of Gold
Germany’s call for repatriation of some it’s gold from the United States and France is another indication of the monetary role central bankers are anticipating for gold in the coming years. Some gold watchers, like James Sinclair, feel this is a game-changing event and another example of loss of confidence in the U.S. government. When Venezuela demanded the return of its 160 tonnes of gold from the United States, it took only a few months to acquire. Why does Germany have to wait seven years for the U.S. Fed to deliver 300 tonnes? One obvious answer is the gold is not available at this time.
Japan’s Monetization as Forerunner to U.S. Monetization
Although the United States is monetizing its debt through the Fed’s purchase of Treasuries, Japan is even further along this road and we can learn about the future of the U.S. economy by looking at Japan’s example. Japan, which has the worst balance sheet of any of the world’s developed nations, has survived partly because it is self-funded and is less dependent on foreign bond purchases.
Japan’s death rate now exceeds its birthrate. The population is aging and retiring and therefore the Japanese public are becoming bond redeemers rather than bond buyers. As well, Japan’s relationship with China has soured significantly over the Japanese government’s decision to “nationalize” the Senkaku islands, which the Chinese claim as their own. The Japanese auto industry has suffered significantly. Japan has still not recovered from the Fukushima Daiichi nuclear disaster caused by the 2011 tsunami. Because of these developments, Japan’s central bank will buy 56 percent of the country’s issued treasury bonds this year.
Complexity, Obfuscation and Scandal
This past year was also one of unprecedented complexity, obfuscation and scandal. These are symptoms of the final days of an economic system. There was the successful prosecution of a countrywide interest-rate rigging scandal that affected all fifty states, known as the Municipal Bond Scandal, or more specifically United States of America v. Carollo, Goldberg and Grimm. Then there was an even larger interest rate scandal, one that affected the entire world. Prosecutions in the Libor scandal, which was uncovered in July 2012, have already begun. Last year banks paid $10.7 billion in fines for such transgressions.
White-collar corruption has never been so apparent, yet regulators seem to be no more interested in bringing this to the public’s attention than are the compliant media.
Despite the blatant flaunting of the law during the subprime crisis, no major player has gone to jail or even been prosecuted. MF Global’s robbery of money from its client accounts, in broad daylight, not only went unprosecuted, but in January 2013 a judged nixed customers’ attempts to depose MF Global’s infamous CEO Jon Corzine. Mr. Corzine, of course, is the former head of Goldman Sachs and a former senator then governor of New Jersey. He is also a major fundraiser for President Obama. Wall Street alumni continue to make their way into political positions as the relationship between Wall Street and Washington becomes even more intimate. With the fox guarding the henhouse, there is little chance of this trend changing course.
What Could Make Gold Prices Stop Going Up?
With an endless stream of “green shoots” reports coming out of the mainstream financial media, gold continues to climb a “wall of worry”. This means that gold is still far from its exponential phase when people start lining up for miles to buy gold as they did in 1980, and despite temporary, healthy interruptions to its price ascent. However, many are still asking what will cause the price of gold to stop going up.
Some mention U.S. resurgence after the much-ballyhooed shale oil fracking program that releases natural gas from shale and is supposed to make the U.S. energy independent. The United States did increase domestic oil production by 766,000 barrels per day during 2012, which resulted in the highest domestic production in fifteen years. Foreign oil now supports just 41 percent of American demand, down from 60 percent seven years ago. Fracking is a dangerous and expensive practice that is unpopular with environmentalists and primarily provides natural gas, which cannot be stored as oil is stored. It will also require decades of infrastructure development. U.S. debt problems are systemic and, as the recent fiscal cliff stalemate indicated, the country may not have decades or even years to right its economic ship.
Negative real interest rates would have to turn positive. Yet for every one percent of official inflation, the United States would have to add approximately $160 billion to its federal debt as indexed pensions and other inflation-sensitive obligations would become much more expensive, as would borrowing to meet these costs.
Raising interest rates in this environment will be almost impossible due to the massive amounts of global debt. In 1981 when Fed chief Paul Volcker raised interest rates as high as 21.5 percent, with official inflation at 7.5 percent, it stopped the flow of currency into gold. This could never happen today, as the United States owes far too much debt to make high interest rates viable.
A deep recession in countries like India and China that are major gold buyers could negatively impact the price of gold. However, history shows that such harsh economic conditions in countries that believe so strongly in gold may have the opposite effect and cause even more capital to flee to the protection gold offers. People become even more serious about wealth preservation in times of crisis. Little, short of discovering how to make gold from salt water, will change the primary direction of gold, which for the coming years is upward on its way to $10,000 an ounce and beyond.
Where is gold heading in 2013?
This year, 2013, will likely be a more positive year for gold than 2012, if history is a reliable indicator. Over the past decade, since gold began to regain its stature as money, U.S. election years have been lacklustre for gold and the following year has shown a significant rise in price.
Currently, it takes very little for short-term optimism about gold to turn bearish. This is further indication that gold has much further to rise. Each time a hedge fund or government intervention causes a precipitous drop such as we saw twice in December, gold sentiment becomes weaker. Mark Hulbert of Hulbert Gold Newsletter Sentiment Index, or HGNSI, had this to say about negative sentiment towards gold:
. . .of the last three decades has shown that, at the 95% confidence level that statisticians often use to assess whether a pattern is most likely genuine, gold tends to do better in the wake of low levels of bullish sentiment (like now) than in the wake of excitement and enthusiasm.
- Mark Hulbert
This past year, 2012, showed a strong negative bias amongst most sentiment indicators such as the Hulbert Survey and Market Vane. This is a strong contrarian signal for the coming year.
The Gold and Debt over the next decade chart shows the projection of U.S. debt, assuming gold will continue the same close relationship with debt as demonstrated in the historical gold and debt chart discussed earlier.
Gold’s price is directly proportionate to the massive amount of debt that is being created to keep the current fiat system alive. This will likely continue until a crisis, such as a severe global recession or hyperinflation, strikes one of the major developed economies. Either event will be bullish for the gold price, but for different reasons. The price is being driven by the physical market in the developing countries, especially India and China. China has to continue buying as much physical gold as possible if they expect to eventually compete for world reserve currency status.
Some estimates state the Chinese hope to have at least 10,000 tonnes to out-rank their main competitor for gold holdings–the United States.
In 2012, the world mined gold production was approximately 2,700 tonnes. Of which India and China bought nearly 2,000 tonnes between them. Over the past five years, emerging markets accounted for 70 percent of gold demand.
The question of who actually owns the United States’ gold is debatable and made particularly opaque by complex, highly secretive gold lease agreements. The increased calls for gold repatriation and for audits of Fort Knox and the U.S. Federal Reserve could shed light on this issue in the coming years.
This is the perfect time to hold gold and silver for wealth protection. Fund redemptions, negative institutional sentiment, financial repression and the raging currency war ensure gold will continue its climb towards $10,000 an ounce. I expect that gold will end 2013 between $1,900 and $2,000 an ounce, and silver between $40 and $45 an ounce.
In a world where financial and geopolitical certainty is evaporating, no one knows what Black Swan event could cause an explosion in the gold price. Some have suggested it will be the failure of a major bank through derivative exposure, or a Middle East war. A major downgrade of U.S. bonds might also be the catalyst. In 2013, as has been the case since 2001, the best policy for wealth protection remains to simply buy and hold uncompromised bullion until we are once again on solid economic footing.