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Gold Crashes Most in 30 Years … What Does It Really Mean?

Posted By Washingtons Blog On April 16, 2013 @ 1:30 am In Gold & Precious Metals,Think Tank,Trading | Comments Disabled

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Why Is Gold Crashing?

Gold has fallen off a cliff. It has fallen faster than at any time in the last 30 years [1].

Zero Hedge notes [2]:

Adding insult to injury, the Shanghai Gold Exchange overnight announced that following the tumbling precious metal prices and limit down drop in early trading, it may raise trading margins for its gold and silver forward contracts.

(Margin calls tend to trigger further selling.)

Some Say It Is a Good Time to Buy

While most financial advisers are screaming “sell!”, there are some well-known contrarians.

For example, Bill Gross [3] still recommends buying gold.

Marc Faber says [4]:

“I love the fact that gold is finally breaking down because that will offer an excellent buying opportunity” …. “The bull market in gold is not completed.”

John Hathaway of Tocqueville Funds (with $10 billion under management) says [5] that the selloff in gold is “a contrarian’s dream scenario”:

The evidence shows strong macro fundamentals for gold, investor sentiment at a negative extreme and compelling valuations in the mining shares. It seems like a contrarian’s dream scenario to us.

And Zero Hedge notes that – from the perspective of technical analysis – gold is the most oversold it has been in 14 years [6].

The Bearish Explanation

But why has gold crashed?

Bloomberg blames [7]:

  • “Optimism that a U.S. recovery will curb the need for stimulus”; and
  • “The prospect that beleaguered members of the euro zone might be forced to sell gold to raise part of the funding, and there are much bigger holders in that category than Cyprus.”

Citigroup opines [6]:

Gold decline may have been related to some break in technical levels and the general improvement in global risk appetite.

CNN theorizes [8]:

Monday’s broad decline was sparked by slowing growth in China. The world’s second biggest economy grew by 7.7% in the first quarter of the year, down from 7.9% in the fourth quarter of 2012.

The growth number was higher than the Chinese government’s target for 2013 but much weaker than the 8% most economists were expecting.

Other China data also raised doubts about the health of the global economy – industrial production slowed to 8.9% in March against economists’ forecasts for about 10%.

The weak China data could mean reduced demand for commodities from the world’s second biggest economy and subdued inflationary pressures. Gold is often viewed as a safe store of value when prices are rising.

Larry Edelson writes [9]:

You have to realize that sometimes gold is money … and sometimes it’s not.

Right now, gold is not money. Just consider what’s happening in Japan. The wicked and aggressive devaluation of the Japanese yen is setting off a massive stampede OUT of gold and into cash and other assets.

***

Why are the Japanese dumping gold, especially when their currency is being devalued?

It’s simple. The fall in the Japanese yen caused the price of gold in yen to spike sharply higher. So Japanese investors are cashing in their profits.

In addition, Japanese investors want to either spend their gold proceeds, or move it into other assets. They need liquidity. And holding on to gold is not a liquid situation.

It’s very easy to understand. This sort of thing is also happening in Europe, where gold demand is also down.

Why? Because if you have money in a bank, Cyprus has proven that European leaders will stop at nothing to try to solve Europe’s crisis, even if it means confiscating your money from your bank.

Gold’s not going to do you much good in that situation. If you take your money out of the bank and buy gold, how are you going to pay for the basic necessities in life?

Moreover, how are you going to move your gold out of the country, if that’s what you wish to do (which many Europeans are indeed doing)?

Moving physical gold around isn’t so easy either. It takes time and money to move your gold. And even then, you won’t know how safe it is, because in the back of your mind there’s always that fear that your gold could be confiscated.

The bottom line: While gold is indeed the ultimate long-term store of value against depreciating currencies and failing governments, there are times when forces that are seemingly bullish for gold are actually bearish.

Business Insider argues [10]:

[Gold's price collapse] vindicates the economic ideas of the economic elites.

***

To respond to the economic crisis, economists and mainstream policy makers have favored highly unusual policy measures (massive Fed balance sheet expansion, massive stimulus, etc.). These ideas are usually based on years of traditional economic research (Keynesianism, monetarism, etc.).

All of these ideas have been slammed by heterodox types like Austrian economists, who have warned of hyperinflation, and gold going to $10,000.

So the collapse in gold is not about gold, but about vindication for a large corpus of belief and economic research, which has largely panned out. It’s great that our economic elites know what they’re talking about, and have the tools at their disposal to address crises without creating some new catastrophe.

Things aren’t great in the economy, but the collapse/hyperinflation fears haven’t panned out, and the decline in gold is a manifestation of that.

Barry Ritholtz writes [11]:

History shows Gold trades differently than equities. Why? It comes back to those fundamentals.

It has are none.

This is not to say gold is not affected by Macro issues. But that is very different than saying Gld has a fundamental value, an intrinsic worth. It does not. That led to this heretical advice: Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no earnings, no coupon. no yield. What people call fundamentals are nothing more than broad macro analysis (and how have your macro funds done lately?). Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias.

I do not want to engage in Goldenfreude — the delight in gold bugs’ collective pain — but I am compelled to point out how basic flaws in their belief system has led them to this place where they are today.

Gold does trade technically, and is especially driven by the collective belief system of the crowd. When that falter, well, you know what happens . . .

Gold Bug View

Gold bugs, on the other hand, see things quite differently.

Andrew Maguire says that the crash is solely in the paper gold market … and that there is actually a shortage of physical gold [12]. Many other sources make the same claim [13].

Egon von Greyerz – founder and managing partner at Matterhorn Asset Management – argues [14]:

They shouldn’t be concerned about the temporary pressure on gold. This decline has nothing to do with the physical market because enormous demand for gold continues.

The paper market in gold is not a real market, and at some point in the near future paper gold holders will wake up and realize they are holding are worthless pieces of paper. This is when the world will witness one of the greatest short squeezes in history as investors panic in to physical and the price of gold explodes to the upside.”

London bullion dealer Sharps Pixley thinks that the crash was largely initiated by a single entity [15]:

The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level… the line in the sand.

Two hours later the initial selling, rumoured to have been routed through Merrill Lynch’s floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted ‘short sale’, which by driving prices sharply lower in a display of ‘shock & awe’ – would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called ‘stopped-out’ in market parlance – probably hidden the unimpeachable (?) $1540 level.

The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tonne of gold futures selling in total equates to 15% of annual gold mine production – too much for the market to readily absorb, especially with sentiment weak following gold’s non performance in the wake of Japanese QE, a nuclear threat from North Korea and weakening US economic data.

***

By forcing the market lower the Fund sought to prompt a cascade or avalanche of additional selling, proving the lie \; predictably some newswires were premature in announcing the death of the gold bull run doing, in effect, the dirty work of the shorters in driving the market lower still.

Gold Core’s Mark O’Byrne agrees [16].

James Rickards thinks [17] the Fed is manipulating the gold market (and every other market).

Former assistant Treasury Secretary Paul Craig Roberts says [18]:

Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollar’s exchange rate. The Fed used naked shorts in the paper gold market to offset the price effect of a rising demand for bullion possession. Short sales that drive down the price trigger stop-loss orders that automatically lead to individual sales of bullion holdings once their loss limits are reached.

***

According to Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can be to drive down the market price.

***

Bullion dealer Bill Haynes told kingworldnews.com that last Friday bullion purchasers among the public outpaced sellers by 50 to 1, and that the premiums over the spot price on gold and silver coins are the highest in decades. I myself checked with Gainesville Coins and was told that far more buyers than sellers had responded to the price drop.

***

In addition to short selling that is clearly intended to drive down the gold price, orchestration is also indicated by the advance announcements this month first from brokerage houses and then from Goldman Sachs that hedge funds and institutional investors would be selling their gold positions.

***

I see the orchestrated effort to suppress the price of gold and silver as a sign that the authorities are frightened that trouble is brewing that they cannot control unless there is strong confidence in the dollar.

Roberts also says [19]:

This is an orchestration (the smash in gold). It’s been going on now from the beginning of April. Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance. Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold. So what they are trying to do is scare the individual investor out of bullion. Clearly there is something desperate going on….

Indeed, this may tie into the Federal Reserve leak of insider information. Specifically, Roberts writes [20]:

The Federal Reserve began its April Fool’s assault on gold by sending the word to brokerage houses, which quickly went out to clients, that hedge funds and other large investors were going to unload their gold positions and that clients should get out of the precious metal market prior to these sales. As this inside information was the government’s own strategy, individuals cannot be prosecuted for acting on it. By this operation, the Federal Reserve, a totally corrupt entity, was able to combine individual flight with institutional flight. Bullion prices took a big hit, and bullishness departed from the gold and silver markets. The flow of dollars into bullion, which threatened to become a torrent, was stopped.

As Congressman Grayson pointed out [21] in a recent letter, right after the Federal Reserve’s Open Market Committee leaked valuable inside information to big banks, Goldman told its clients:

We recommend initiating a short COMEX gold position ….

Background on gold manipulation [22].


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2013/04/gold-crashes-most-in-30-years-what-does-it-really-mean/

URLs in this post:

[1] 30 years: http://www.zerohedge.com/news/2013-04-15/gold-drops-most-30-years

[2] notes: http://www.zerohedge.com/news/2013-04-15/shanghai-gold-exchange-hike-gold-silver-margins

[3] Bill Gross: http://www.businessinsider.com/bill-gross-i-would-buy-gold-here-2013-4

[4] says: http://www.washingtonsblog.com/2013/04/www.bloomberg.com/news/2013-04-15/gold-extends-bear-market-losses-as-investors-reduce-etp-holdings.html

[5] says: http://online.barrons.com/article/SB50001424052748704567604578417063254673832.html

[6] most oversold it has been in 14 years: http://www.zerohedge.com/news/2013-04-15/all-eyes-gold-rout-most-oversold-14-years

[7] blames: http://www.bloomberg.com/news/2013-04-15/gold-extends-bear-market-losses-as-investors-reduce-etp-holdings.html

[8] theorizes: http://money.cnn.com/2013/04/15/investing/gold-prices-china/

[9] writes: http://www.moneyandmarkets.com/experts/larry-edelson

[10] argues: http://www.businessinsider.com/the-gold-collapse-is-great-news-for-the-elites-2013-4

[11] writes: http://www.ritholtz.com/blog/2013/04/what-are-golds-fundamentals/

[12] solely in the paper gold market … and that there is actually a shortage of physical gold: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/4/12_Maguire_-_There_Is_Absolutely_No_Physical_Gold_For_Sale.html

[13] same claim: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/4/13_Haynes_-_Were_On_The_Verge_Of_Major_Gold_%26_Silver_Shortages.html

[14] argues: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/4/14_Tragedy%2C_Panic_%26_The_Greatest_Shortest_Squeeze_In_History.html

[15] initiated by a single entity: http://news.sharpspixley.com/article/ross-norman-gold-crushed-by-400-tonnes-or-usd20-billion-of-selling-on-comex/159239/?utm_source=twitterfeed&utm_medium=linkedin

[16] agrees: https://www.goldcore.com/goldcore_blog/massive-20-billion-paper-gold-sell-orders-trigger-stop-loss-selling-and-unfounded-pani

[17] thinks: http://www.businessinsider.com/gold-bugs-this-gold-crash-is-a-government-conspiracy-2013-4

[18] says: http://www.paulcraigroberts.org/2013/04/13/assault-on-gold-update-paul-craig-roberts/

[19] says: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/4/12_Former_US_Treasury_Official_-_Fed_Orchestrated_Smash_In_Gold.html

[20] writes: http://www.paulcraigroberts.org/2013/04/04/the-assault-on-gold-paul-craig-roberts/

[21] pointed out: http://www.washingtonsblog.com/2013/04/congressman-grayson-asks-for-an-investigation-into-federal-reserves-fomc-leak.html

[22] Background on gold manipulation: https://www.google.com/search?client=firefox-a&hs=rQ8&rls=org.mozilla:en-US:official&sclient=psy-ab&q=site:washingtonsblog.com+gold+manipulation&btnG=&oq=&gs_l=&pbx=1&sei=7StsUdqQMajpigKWz4HwDg&gbv=2

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