Sunday, July 26, 2015

The Attack on Precious Metal Prices

Gold hit a five year low this week, and the intra-day low on Monday was the lowest price in 13 years.  If you watch "technical analysis" (my definition: drawing lines on charts and thinking they mean something), you'll know that by going below $1100/oz, it solidly broke the "support line" at $1130, which was thought to be a dependable "floor" to the price.

So what's going on?  Keith Fitz-Gerald, writing at Bonner and Partners, says it was nothing less than a coordinated bear attack.  Bill Holter, writing at Jim Sinclair's Mineset agrees (H/T to Western Rifle Shooters Association).
If you’ve just joined us, a bear raid is a highly technical tactic typically used by large institutional traders or “short and distort” artists. The goal is to create windfall profits though short sales, options, futures contracts, currencies, and whatever else can be brought to bear.
First off, a little perspective.  A lot of gold was sold; far, far more than on a typical day.  More than 3 million lots traded on the Shanghai Gold Exchange; a normal day is less than 30,000 lots; 1/100 the amount traded on Monday.  
 
Why Monday?  Monday’s raid was carefully timed to exploit low-liquidity conditions; lots of contracts but not much liquidity lying around as the owners of those contracts probably had to cover losses from the Chinese crash or lower market prices everywhere else. There were no economic reports or industry-significant events when it hit.  Also, Japan's market was closed and they could have affected the outcome of the raid if they didn't want to play along or fought hard to bid up the price.

Who could affect that much gold sales?  Zerohedge reports a "hunt for the mystery leader of the bear raid" has begun, but from what I've heard, they typically don't find anyone.  A few of the major Exchange Traded Funds (ETFs), or "paper gold" traders, and a handful of nations could sell that much gold without hurting.  China, notably, has been buying gold for quite some time, and as Holter points out, needs to reach a certain percentage of gold holdings to be admitted to the International Monetary Fund's Special Drawing Rights (around 2.7% of GDP in gold seems to be where the IMF is happy).  You've probably seen the warnings posted as adverts for somebody's products which say that a major currency disruption is coming in October.  One line of thought is that the IMF is going to switch the world to their SDRs as the reserve currency and abandon the dollar.  SDRs are the currency of last resort as it hasn't been reduced in value by over printing like ours, and most of the rest of the currencies in the world.  As Holter puts it:
As a theory, most believe the 600 tons of gold announced by China last week was the reason for the Sunday/Monday drop.  This I believe is correct but for 180 degree wrong reasons.  Many were shocked and disappointed at the number of only 600 tons.  It truly is laughable as it represents about 3 months worth of gold China currently imports and has been for over 5 years.  I believe they made this announcement for two reasons.  First, they needed to show more gold in order to be considered by the IMF for inclusion into the SDR this fall.  I also believe they wanted to show a lower number so as not to spook gold higher as they are clearly a buyer each month.  If you are a buyer, why press the price higher as long as you are receiving delivery? 
The Chinese have been increasing their gold supplies for years now.  During some periods in 2013, for example, they bought every ounce of gold produced in the world.  Could the Chinese have enough gold to sell off 3 million lots on the Shanghai Exchange and run the bear attack?  Why would they want to?

Aside from the short term "let's make a metric butt load of money" aspect, Holter sees it not as part of the ongoing currency wars we've been in for a while, but as opening salvos of World War III.
Going a step further and tying this all together we can see several things happening.  China is now witnessing an unprecedented capital outflow while the U.S. dollar has gotten stronger.  A strong U.S. dollar is textbook warfare against Russia and aimed at tightening the screws further both financially and economically. We have heard from Sergei Glayzev on several occasions, Russia/Mr. Putin plan on dropping a financial and moral “truth bomb” on the United States.  They will only be pushed so far, I believe some sort of data dump can be expected at any moment.

If you look at this from the standpoint of “war”, these are all chess moves between those issuing a fake currency and those wanting to do real trade with real settlement.  Did the U.S. just “punish” China for being a gold buyer and making an announcement (even though miniscule)?  I think this can be looked at as the Western banks are short paper gold derivatives and long dollars whereas the East is long real metal and desirous of leaving the Western banking system behind.  There is no other reason China and Russia would have set up trade banks, clearing systems, currency hubs etc. all over the world if they did not expect to use them.  This is a war between the West wanting to prolong their own current fiat system and the East wanting to move away to one that is equitable to all involved.
This has, of course, spread to silver as we talked about Monday, after all this manipulation took place.  The US Mint suspended sales of silver eagles before all this started, and I'm reading reports that many (all?) silver sellers are either refusing orders or talking about long lead times; like two or three months.  That's a physical shortage if there ever was one.  Fitz-Gerald suggests that the ease with which gold was brought below its resistance line is an indication there might be more losses yet to come.  It's an absolute truism that you want to buy when "there's blood in the streets".  If you're interested in having gold, the streets are either bloody right now, or they're going to get bloody soon.   

Last words to Bill Holter at Jim Sinclair's Mineset:
We are already in WW III.  It is because of and being waged in financial assets.  It is clear to me the U.S. is in panic mode and trying to break the long term bull trend in gold.  If the trend cannot be broken, the dollar will be zeroed out.  Unfortunately, both sides know this full well.  The military warnings of late from both Russia and China have become much louder and the actions and movements by the U.S. (staging in Turkey for Syrian raids for example) much more dangerous.  As I see it, the U.S. “needs” war to cover many dirty financial tracks.  China/Russia on the other hand may try to prevent war by releasing “the truth” and thus crippling the U.S. financially and thus the ability to wage aggression.  The problem as I see it is the world is too far along technologically and the days of having to pay and fund an army long term is behind us.  Now, “kicking the table over” is a simple as pushing a button.  Unfortunately, this may be the only remaining choice for the U.S. in the financial collapse I see coming.


5 comments:

  1. Is there manipulation in the PM market? There is always manipulation in all markets. Sometimes successful, sometimes big but usually unexposed. I cannot say that there was some major manipulation in the PM market this week or two weeks but someday we may know for sure. But it matters little because it is impossible to manipulate any world market for long. So someone, maybe China, may have benefitted short term but the market will regresse to the mean fairly quickly.

    Is it a precursor to war? I doubt it. There are so many other commodities that are essential to preparing for a war and PMs just don't show on that long list. China hoarding gold is more about dominating a productive and freely trading capitalist future and not a future war. Massivily hoarding gold doesn't preclude the possibility of war but it doesn't predict it either.

    I think what is happening is simply that the Chinese and many others can read the writing on the wall and understand the world is likely facing an unprecedented economic collapse and the best way to profit from it (and to prepare to survive it) is to hold PMs.

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  2. indyjonesouthereJuly 26, 2015 at 8:44 PM

    There have been huge currency outflows from China which may be the result of their frothy markets and failure of the government to let the markets work their own outcome. China has sold huge US treasury holdings and I wouldn't doubt they sold large gold holdings to compensate. All of this is deflationary and showing up on most everyones radar. Commodities (including gold) do not do well in a deflation/depression. Welcome to the strong dollar era.

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    Replies
    1. Precious metals can do quite well if fiat currency deflates. And it is universally liquid to convert to over currencies or commodities. Why do you think the US outlawed private ownership of gold in the great depression ? Currency doesn't like competition.

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    2. Precious metals can do quite well if fiat currency deflates. And it is universally liquid to convert to over currencies or commodities. Why do you think the US outlawed private ownership of gold in the great depression ? Currency doesn't like competition.

      Delete
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