For all the fuss about gold last week, we were so busy telling everyone else what was going on with gold that we had no time to write something for our own clients and readers.
Everyone we spoke to wanted to know if this was the end of gold.
Despite what the newspapers wrote, despite the efforts of newsreaders and despite calls from banks that gold was no longer a safe-haven this has certainly not been the sentiment of clients at The Real Asset Company.
We’ve have had clients buying in record numbers, and almost no clients selling. Singapore has continued to be our most popular vault location.
In an on-site survey, which was open to all, we asked ‘What does the declining gold price mean for you?’ At the time of writing 72% of respondents had told us that they saw it as an ‘opportunity to buy more’. Less than 3% were selling their gold, whilst just 15% said the drop had them worried.
It seems that in both our clients’ and readers’ opinions, the gold price is in a better position than it was a fortnight ago – it’s a whole lot cheaper, so they buy gold in response.
What happened to the gold price?
Was the gold price smash predictable? Should we have seen this coming?
According to John Brimelow the likelihood of the gold drop was low: “Friday [April 12th] was a 4.88 standard deviation move in the price of gold. For simplicity’s sake let’s call it a five standard deviation move. Statistically we get a five standard deviation move approximately once every 4,776 years. So we should not expect another move like this out of the price of gold until May the 17, 6789 AD.”
But what happened to cause such a rare event?
Gold market manipulation has been a key headline grabber in recent weeks. It’s something that whilst we don’t ignore it, we do pay little page space to it.
For many commentators, such as Hugo Salinas-Price, “the intention…was to make gold investors think that their judgment regarding gold as a refuge for savings was mistaken, and to change their behaviour accordingly: shun gold purchases.”
Doug Casey believes that the take down of the gold price last week was most likely due to the culmination of several events meeting in the same week.
No-one really knows what caused the drop, but the events which conspired knowingly or unknowingly with one another were as follows:
- Cyprus was rumoured to have been told to sell its gold bullion reserves
- Outflows in gold ETFs
- Goldman Sachs’ report, the day before the drop, declared the end of the gold bull-market
- Early release of the FOMC minutes showed some members felt QE should wind up faster than previously expected.
Cyprus is selling their gold
Let’s address Cyprus and other European countries being forced to sell their gold. Whilst their gold (14 tonnes) represents a very small amount of total gold held by central banks, this concerned markets that Cyprus’ gold sales would set a precedent for other indebted and weak European countries – namely Italy and France, which hold 2,451 and 2,435 tonnes respectively
Should faltering Eurozone economies be forced to sell their gold this will merely accelerate the transfer of wealth from the West to the East. It will be the Asian and other developing countries’ banks snapping up the gold, there will be little time for European gold to flood the market and depress the price, as so many fear will happen. How do we know this will happen? Not only have Asian, and other developing economies, been the largest central bank buyers of gold in the last few years, but they plan to keep buying gold.
Since gold’s drop last week several Asian central banks are reported to have expressed interest in increasing their gold reserves. The Sri Lankan central bank governor has said that the bank will look ‘favourably’ at buying more gold.
Goldman Sachs’ report cannot go unnoticed. According to FT Alphaville, they wrote “Given gold’s recent lacklustre price action and our economists’ expectation that the acceleration in US growth later this year to above-trend pace will support US real rates, we are lowering our USD-denominated gold price forecast once again…While there are risks for modest near-term upside to gold prices should US growth continue to slow down, we see risks to current prices as skewed to the downside as we move through 2013.” Goldmans’ also referred to gold’s lacklustre performance despite on-going Eurozone concerns. The report was published just the day before the drop.
Given Goldman Sachs’ power in the market place, it has been suggested that the timing of their report was a bit more than a coincidence.
On Friday 12th April 400 tonnes of paper gold appeared on the market in one instant bringing the price down with it, over the next couple days gold futures fell the most in 33 years.
Bud Conrad writes, “Such an entity [to have dumped the gold] 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… 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.”
Large speculators in the market, such as JP Morgan or Goldman Sachs, can not only profit from the market but they can also move the market. Whilst it isn’t known who dumped 400 tonnes, it is clear that they weren’t looking to make a profit from the sale alone – had they been they are no doubt experienced enough to use sensible trading practices and would have done so. It’s not impossible to imagine a large speculator cornering and moving the market. Just think about LIBOR for a start.
FOMC ‘early’ release
Reports that some members of the FOMC were looking to wind up QE sooner than expected may have spooked the markets into thinking a US recovery was on its way and safe-havens, such as gold, were no longer needed. This information was ‘leaked’ in the early release of the FOMC minutes, a day earlier than expected, on the 9th April.
Once again the early release of FOMC minutes is something which has been surrounded by manipulation rumours. What’s this got to do with the Fed? Well, the chances of their slowing down on QE are, we believe, slim. Despite the relative strength of the currency and recent figures, very little has changed for the better.
Given the manner 400 tonnes was sold on that Friday morning, some believe this could have been orchestrated by a central bank. Perhaps a central bank who is looking for the gold price to move lower, because as Bud Conrad writes, ‘it would provide cover for its printing of more new money.’
On Friday 12th over $1 billion was pulled out of GLD, the largest gold ETF, on Monday 15th $188 million and the following Tuesday saw outflows of $563 million. All year holdings of gold backed ETFs have been declining. Prior to the April gold price drop, holdings in gold ETFs had fallen by 7% since January. Goldman Sachs (on 10 April) wrote that they see no sign of this abating. SocGen also noted ETF outflows as a negative for gold’s future. According to Reuters, bullion holdings in GLD fell to 35.5 million ounces on Monday, a near 2% drop, its lowest level since November 2009. In the last year GLD has seen $12.2 billion in net outflows.
Is this a sign that faith in gold is lost? We don’t think so. But, when it comes to paper gold this may well be the case.
One thing that is for certain, last week we saw the breakdown of any real relationship between the physical gold market and the paper gold market, the contrast between the two was clear.
Keep getting physical
Was this manipulation? We’ll never know. But why do we need to know? The only factor we know to be true, amongst all of this, is that gold’s drop has sent a flurry of gold buyers into the market.
We all know that those who invest in physical gold and those who only speculate in paper have a couple of differences in how they see gold. As Sprott’s David Franklin and David Baker point out, for the former gold is a currency, for the latter it is a commodity. Moves in the market last week were caused by ‘speculators’ not those looking at the reasons to hold gold in the long-term.
The sudden panic selling of over 1,000 tonnes in the speculative markets is not reflective of the real gold buyers who have been queuing in their thousands to buy gold in the last fortnight.
The price of gold is largely driven by the excess amount of paper gold available. But the last week has shown that the man on the street, and Eastern central banks, pays little heed to this element in the gold price.
They want physical gold.
The gold price drop saw investors across the world, but most significantly in Asia, turn savvy and use the opportunity to ‘buy on the dips’. Similar to the behaviour we are seeing from our own clients.
We are seeing a significant change in mind-set than what we perhaps saw in 2008, when a similar crash occurred. Today we are much deeper into the financial crisis. 5 years ago, it was new and we paid attention to governments who convinced us that this could be fixed.
Now, governments continue to use (and increase) their ‘temporary’ measures to solve the crisis. QE is still in existence, Japan is drunkenly turning up the music at the party and we suspect Cyprus’ bail-in will be an increasingly used model for bank failure. Market sentiment also remains low, whilst interest rates cannot go any lower.
The gold price may have dropped but it still remains as valuable as ever to those feeling the effects of five years of government papering over the cracks.