Gold Bear Market or Physical Gold Discount Sale??

Back in 1980, just as the gold price blasted upwards past $800/oz, buyers reportedly lined up in droves at various bullion dealers to participate in the rally. Investment analyst Jay Taylor writes, “I remember 1980… there was panic buying of gold by people in the streets of New York City. They were lined up around the block to buy gold and Krugerrands at that time.” That flurry of buying ended up representing a classic top. As gold failed to move higher, the speculative frenzy soon reversed into a despondency that dragged gold into a twenty year bear cycle. For those investors who bought at the top, it was a hard lesson learned.

Fast forward to today, and in the days that have followed this past Friday’s (and Monday’s) incredible gold price smash, the strangest thing has happened: physical buyers have come out in droves, but this time they’re buying immediately following an unprecedented $200 price decline.

Consider the following:

The US Mint reported selling 63,500 ounces (2 tonnes) of gold on April 17th alone, which brought total April month-to-date sales up to 147,000 ounces – more than the previous two months of gold sales combined.1 The US Mint’s year-to-date sales are now up 79% from the same period in 2012.

Coin dealers in Tokyo and Dubai reported an immediate spike in sales following the gold smash this past Friday. Reuters writes, “A week ago, as the yen-denominated price neared a new peak, jewelry stores and gold merchants across Japan saw long lines of mostly older Japanese looking to cash in on unwanted jewelry and other items that they had held for years… But on Tuesday, buyers outnumbered sellers by a wide margin. At Ginza Tanaka, the headquarters shop of Tanaka Holdings, gold buyers waited for as long as three hours for a chance to complete a transaction.”

In Dubai, jewelry outlets reported they are now temporarily out of gold coins and all sizes of gold gram “biscuits”.2

In India, retailers also saw an immediate surge in demand following the price decline, prompting some retailers to predict up to a 50 percent spike in sales volume in the upcoming marriage season.3 The Wall Street Journal quoted a jewelry salesman in Mumbai’s Zavery Bazar, who stated, “We have not seen such strong demand in many years. Our order books are already 30%-40% more than last year’s festival day… We don’t have enough staff to keep up with this kind of mad demand.”4

We have also seen the same reports coming from the Perth Mint in Australia, and even here in Toronto, where the line-up at Scotia Mocatta’s bullion desk numbered more than one hundred long on Wednesday. A colleague confirmed that virtually all participants where there to buy more bullion, rather than to sell.

This phenomenon clearly appears to be happening globally. A friend of the firm had this to report from Hong Kong: “Went to Hang Seng bullion counter yesterday. The line was out the door. It took an hour wait to see a teller. When I asked if people were buying in the dip or selling in panic, she told me that they haven’t had one ounce of gold sold back to them all day. She told me they have sold more gold in 24 hours than they normally do in three months. Yes, there was a lot of extra security. The guy in front of me bought over $1 million USD in gold. He paid in cash and walked out of the door with the bullion in a Nike bag. Amazing.”

Regardless of one’s view on gold, one must admit that this kind of buying frenzy defies the traditional rules of investor psychology. After two days of what looked like outright panic selling from precious metals futures participants and ETF holders, we wouldn’t expect to see such a massive surge in physical bullion demand from individuals across the world. When gold fell precipitously in 2008, there was no such reaction.

For now, all we can conclude is this: There is definitely a striking psychological disconnect growing between the buyers of physical gold and silver, and the financial community that trades precious metals through ETF’s and futures contracts. While the latter have ostensibly turned their back on gold (see the plethora of negative sentiment expressed by various pundits over the past three days), the former group has been spurred into action as if they know something the other group does not. Certainly we wouldn’t expect individuals to be buying these metals if they believed the price was going to drop further, or perhaps they don’t care either way and simply want to own something tangible. Nonetheless, it is a wholly peculiar phenomenon, and it is definitely not the same investment behaviour we have seen before.

We still don’t know what entity chose to crush the gold price with a 400 tonne sell order last Friday. Certainly no rational group would dump that much paper gold on the market without a pre-established desire to torpedo the gold price. Their efforts clearly worked in the short-term, but the reaction from physical buyers strongly indicates an official bifurcation between physical metals investors and the exchange-oriented investors who trade gold through financial products.

The days to come will prove if this surge in physical demand is an aberration, or the beginning of a new chapter for the physical gold market. If it represents the latter, precious metals investors may be wise to ignore the ‘paper’ price of gold altogether. The line-ups in 1980 represented the top of the gold bull market. But what do line-ups for gold represent when the price has already fallen 30% from its all-time high? That’s the question, and we’re guessing it means this current gold bull market isn’t close to being over.


Gold: The fear bubble bursts

The total amount of gold in the world, according to Thomson Reuters, is 171,300 metric tonnes, or 5.5 billion troy ounces. What that means is that every time the price of gold falls by $100 an ounce, as it did on Friday and it has done again today, the value of the world’s gold falls by more than $500 billion.

That doesn’t mean investors have lost $1 trillion in the space of two trading days. Some gold is used in industry or jewelry, and there’s a huge amount in central banks, which don’t mark to market and therefore aren’t really investors as we normally understand the term. Still, with a “market capitalization” at the end of 2012 of about $9 trillion, the gold market is not much smaller than the NYSE, is twice the size of the Nasdaq, and is almost three times the size of the Tokyo and London stock exchanges.

As a result, the falling price of gold is more important than simply being an opportunity for schadenfreude around the likes of Glenn Beck or John Paulson or Zero Hedge. At the end of 2012, for instance, Paulson owned 21.8 million shares of GLD. Those have sunk some 19%, or $30 per share, since then — a total loss of more than $650 million, for Paulson and his investors. But that’s just a drop in the bucket compared to the $1.6 trillion wiped off the value of gold more generally during the same period.

To put that number in context, the NYSE has risen 6.6% since the end of 2012, a rise in value of some $930 billion. Which means that the value of gold has been falling faster than the value of stocks has been rising. But gold is held in much more concentrated hands: most people have very little exposure to it, while a relatively small number of investors have huge allocations. As a result, the wealth effect from the fall in gold prices is likely to be felt quite acutely.

Gold is the classic zero-coupon perpetual bond: an asset whose industrial value is a tiny fraction of its cash value, and which represents, as Joe Weisenthal says, a costly failure of markets to efficiently allocate capital to where it is best invested. Goldbugs are by their nature defeatist and pessimistic; get enough of them together at the same time and they become self-fulfilling. (That’s why they tend to be so evangelical about their beliefs.)

So what does the fall of the gold price mean for the rest of us? The first thing to worry about is the wealth effect: if people have suddenly lost a trillion dollars, does that mean they’re going to spend less, and hurt the broader economy as a result?

I doubt that, somehow. About 2,500 tonnes of gold is tied up in gold ETFs. That’s about 80 million ounces, which translates to investor losses of about $16 billion in the past couple of days. On top of that, there have probably been about $3 billion of losses in the futures market. Those numbers — a proxy for the gold positions which are marked to market regularly — are relatively modest: they’re much smaller than the $100 billion or so that has been wiped off the valuation of Apple this year alone.

What’s more, very few investors have leveraged positions in gold, and when asset bubbles burst, it’s normally the leverage, more than the bursting bubble itself, which does the most damage.

Still, there will be pain — pain which is necessary to break the gold fever. It’s important that goldbugs are seen to not only have silly beliefs, but also to have lost a substantial amount of money. Gold is a fear trade rather than a greed trade — it’s defensive, and defensive investors are always particularly loss-averse. If you lose money betting on high-flying tech stocks, that’s much more likely to be money you can afford to lose than if you lose money after putting your life savings into precious metals. (Silver, as befits its status as the “B” share of gold, is also being hit badly today.)

The biggest problem in the markets right now is that they’re still far too risk-averse. Fear-based assets like gold, Treasury bonds, and cash are in high demand, while there isn’t enough money flowing through greed-based assets like stocks and bank loans and into the economy as a whole. Even if the stock market is expensive, the number of primary and secondary offerings remains low; similarly, banks are not expanding their loan books nearly fast enough.

What the system needs, then, is a stark reminder that fear-based assets can be just as risky as greed-based assets. Rising interest rates can eat away the value of your bond portfolio, inflation can erode your cash, and as for gold (or bitcoins, for that matter), well, it can plunge in value literally overnight.

My hope is that the price of gold will continue to fall, that goldbugs will look increasingly silly, and that as a result Americans with savings will conclude that the best thing to do with those savings is to put them to work in a productive manner, rather than self-defeatingly trying to protect what they have.

At the end of the 1990s, and again in the mid-2000s, we had greed bubbles. Both those bubbles burst, and the weird result was a fear bubble, which manifested itself in negative risk-free real interest rates and a soaring price of gold. Let’s hope that what we’re seeing right now is the fear bubble bursting. It’s what the world needs.


Gold slips as fund shift seen intact, TOCOM jumps on yen

Gold edged lower on Monday
after rising by the most since November in the previous session
on poor U.S. jobs data, with funds expected to continue cutting
bullion holdings for better investment yields elsewhere.
But gold futures in Tokyo jumped almost 5 percent to near
all time-highs, marking their sharpest daily rise since
September 2011, after the yen dropped to near four-year lows on
reports the Bank of Japan would begin buying longer-dated bonds
immediately to beat deflation.
Spot gold had dropped 0.2 percent to $1,578.94 an
ounce by 0642 GMT, also hurt by a firmer dollar versus a basket
of currencies.
Gold climbed nearly 2 percent on Friday after data showed
U.S. employers hired at the slowest pace in nine months in
March, backing expectations the Federal Reserve would sustain
its bullion-boosting monetary stimulus programme.        
But Monday's price drop shows the fund shift out of gold
remains intact with the U.S. economy generally expected to
perform better in the longer term, said Joyce Liu, investment
analyst at Phillip Futures.
"People are really pulling funds out of gold for better
investments such as equities and real estate in emerging
economies," said Liu.
"The kind of rally that we saw from 2009 to 2011 is no
longer going to be there anymore. We are more or less used to
having so much money flowing around in the economy."
Liu said she sees gold testing a support level of $1,530,
possibly over the next two weeks. 
Gold hit a 10-month low of around $1,539 last week and is
down nearly 6 percent this year. In contrast, the S&P 500 stock
index has gained almost 9 percent.    
    Others are more bearish on gold's prospects.
    "The lack of investment interest is currently a key drag on
the market," Credit Suisse analysts said in a note.
    "With technical momentum turning negative, there is a risk
for a shift lower towards $1,520 and ultimately $1,500, which is
a critical technical area that needs to hold for the sideways
trend to remain intact."
    U.S. gold futures were up 0.2 percent at $1,579.10
an ounce.
    Bullion holdings at the world's major gold exchange traded
funds continued to fall, hitting their lowest
since August 2012. 
    In Tokyo, gold futures surged as much as 4.8 percent to
5,025 yen ($51.71) per gram, near the record high of 5,081 yen
touched in February, as the yen faltered. 
    The most-active February contract on the Tokyo Commodity
Exchange closed up 4.5 percent at 5,015 yen, the biggest
single-day percentage increase since Sept. 27, 2011.
    The Japanese currency slid to 98.85 versus the dollar, its
weakest since June 2009, on reports that the central bank would
buy 1.2 trillion yen ($12.35 billion) of government bonds with a
maturity of over five years this week, showing a sense of
urgency never before seen in the BOJ. 
    "If the yen goes up to 100 then we have quite a good chance
to try higher prices for TOCOM gold," said Yuichi Ikemizu,
branch manager for Standard Bank in Tokyo.     
    Last week, the BOJ promised to inject about $1.4 trillion
into the economy in less than two years, a gamble that sent bond
yields plummeting as prices rose on the prospect of massive
purchases of debt by the central bank. 

  Precious metals prices 0642 GMT
  Metal             Last    Change  Pct chg  YTD pct chg    Volume
  Spot Gold        1578.94   -2.56   -0.16     -5.71
  Spot Silver        27.30    0.00   +0.00     -9.84
  Spot Platinum    1539.24    8.24   +0.54      0.28
  Spot Palladium    729.72    3.31   +0.46      5.45
  COMEX GOLD JUN3  1579.10    3.20   +0.20     -5.77        19847
  COMEX SILVER MAY3  27.25    0.03   +0.09     -9.87         3473
  Euro/Dollar       1.2984
  Dollar/Yen         98.54

  COMEX gold and silver contracts show the most active months
 ($1 = 97.1700 Japanese yen)