John Ward – Gold, Greed & Collapse : Who Benefitted Most From Yesterday’s Spectacular Fall – 13 April 2013

goldfall13413What you see above isn’t just the tale of a horrendous day for gold – it fell $88, or just over 4%, in a day – it is the record of a fall that steepened the minute New York opened, twice tried (and failed) to rally, and yet managed to do all this on a day when the vast majority of fundamentals should’ve been pushing the price up, not down.

The one exception to this was the Troika demand on Thursday that Cyprus sell its gold to help pay off debt. I have two observations to make about that: one, why do that to Cyprus now and not to anyone else before? And two, on paper it didn’t look like the sort of volume to start a gold freefall.

This is a murky business, so we need to consider it from all sensible angles.

The fundamentals

The US is degrading and diluting its currency, the UK’s austerity strategy is falling apart, the EU economy is flatlining, and Russia is massively overdependent on energy sales in a world where the outlook for energy consumption is awful: indeed, only the coldest european Spring for decades has enabled it to maintain any kind of momentum.

China’s slowdown now looks inevitable given the atrocious consumption outlook outside its borders, and US economic nerves tightened yesterday when the IMF cut its growth forecast for the year from 2% to 1.7%, alongside official figures confirming a 0.4% slump in retail sales in March – the biggest fall since last July. Factory output in the EU declined, and the north-south imbalance worsened as Slovenia edged towards the centre of the debt radar. Italy’s output fell by a disastrous 8%, and Portugal’s constitutional Court has rejected the Troika’s bailout plan. 41% of Germans no longer believe their banked money is safe.

The myth of Obama’s ‘recovery’ long ridiculed here is now clearly seen for the lie it was. The Cyprus ‘bailin’ has caused massive leakage of capital from the eurozone. The Troika’s Athens talks are acrimonious and stalled.

Every last indicator last week suggested a turning tide for gold as a hedge against currency devaluation, and as an asset which – even if it fell in value medium term – would be better than worthless paper. But that wasn’t the market mood, and it wasn’t what happened. To call that strange is like referring to the Krakatoa eruption as a small bang: worldwide gold demand in 2012 was another record high of $236.4 billion in the World Gold Council’s latest report. This was up 6% in value terms in the fourth quarter to $66.2 billion – the highest fourth quarter ever and real volume demand in the fourth quarter of 2012 was up 4% to 1,195.9 tonnes.

So who were the suspects behind what, I’m fairly sure this morning, was a massive fix?

The manipulation clues

The central banks bought gold at a rate ahead of market growth last year – which means their share of it grew.

Central bank buying for 2012 rose by 17% over 2011 to some 534.6 tonnes – the highest level since 1964. Central bank purchases stood at 145 tonnes in the fourth quarter – up 9% from the comparable period in 2011. Central banks have now been net purchasers of gold for eight consecutive quarters. This despite the non-stop stream of CB spin about there being no money-printing or inflation to get concerned about. Fancy that.

Did anything else make sense of this strategic decision by the Draghulas? Spookily enough it did. Last year, Basel III moved the goalposts on gold’s risk score, moving gold from tier 3 to quasi tier 1 status. Gold thus became “zero percent risk-weighted” in terms of credit risk – a whopping upgrade for the shiny metal. But to buy lots of it (and thus reduce risk-panic among investors) one needs the price to go down.

And guess what? Despite that massive Central Bank buying splurge since late 2010, gold has hovered and wobbled, been weak in its challenging of top prices – and persistent in challenging lows. Or put another way, the exact opposite of what the first rule of Supply and Demand dictates. My oh my.

The Guardian this morning ran a truly daft piece saying that ‘gold fell to its lowest level in more than 18 months on Friday night amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by hard-pressed countries in the coming months’. Pardon me Gruauniad, but “Bollocks”. The sum total of Cypriot selling required is €400m tops. That is a flea-bite on the ankle of the gold sector.

More pertinent, perhaps, is that the Cyprus sale (1) enabled the CBs to buy still more of it, and (2) provides an excuse for the price fall that naifs might accept at face value.

Other potential culprits are also implicated. During January 2013, the COMEX gold futures platform pushed expectations for the price up by 8.3%. One wonders who pushed it in that direction, and why. What’s more, over the last 90 days without any announcement, stocks of gold held at Comex warehouses plunged by the largest figure ever on record. JP Morgan Chase’s reported gold stockpile dropped by over 1.2 million ounces – a staggering $1.8 billion dollars worth of physical gold in just 120 days. The owners involved took their metal offsite, and it’s no longer stored in Comex warehouses…did they do so from a lack of trust? Or did they know something we didn’t?

Then there’s the chance that the Fed itself was trying to reduce its cost of returning gold:  Germany’s Bundesbank recently announced it would be moving a major portion of its reserves from the US and all of its reserves from France back to Frankfurt. Nearly half of Germany’s gold reserves are held in a vault at the Federal Reserve Bank of New York. Nice way to reduce loss of face on safe assets if you work for Washington.

Is there a bottom line here?

There is, but I don’t think one can see the exact nature of it just yet. What seems to me clear, however, is that this was a fix….and Cyprus was a cover story for it, not the reason why.

On balance, it feels to me like some leaking, some massaging, and some reduction in the cost of global looting. But whatever: next week is indeed going to be interesting.

Recently at The Slog: The globalisation of disinformation

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