Monday, February 18, 2013

What’s Wrong with Gold?

Gold priced in the US dollar have broken below technical levels. And some gold bears have been shouting at the top of their lungs declaring that this may be the end of the gold bull market.

They resort to appealing to authority by citing the reduced holdings of popular investors as George Soros, as example.

The real reason behind the calls for the end of the gold bullmarket is that such gold bears have been desiring to demonstrate, that in the face of massive money printing by global central banks, price inflation hasn’t been a threat. 

And since gold serves as hedge of savings against the loss of purchasing power of paper money, such lack of price inflation thereby justifies the actions of political authorities to engage in more expansionist monetary policies.

Yet citing the actions of George Soros doesn’t mean the end of the gold bullmarket. Mr. Soros has previously flipped flopped on gold

Considering that Mr. Soros reportedly made a huge killing ($1 billion) in shorting the Japanese yen, what may have happened was that Mr. Soros may have redeployed part of his gold holdings into the short yen position.

Mr. Soros has reduced his holdings of gold SPDRs during the 4th quarter by 55% but this also means that he still holds 45%.

The current massive interventions by policymakers suggest that the yield chasing phenomenon has only shifted focus by big players to the currency markets.

Analyst Doug Noland at the Prudent Bear writes,
This highly unsettled backdrop forced the big macro hedge funds – and traders/speculators more generally – to keep trades on short leashes (risk control measures that chipped away at performance).  We now see indications that the big players have been unleashed, at least as far as taking – and winning – huge bets against the yen.
Given the current direction of social policies, people's orientation has been reduced to simply profiting from short term yield chasing arbitrages.

It is true that falling gold prices has not just been a US dollar affair, but through a broad spectrum of currencies such as Euro, British Pound, Canadian Loonie, Australian Dollar, Chinese Yuan and the Euro as shown in the chart below from


It is also equally true is that the latest fixation on the yen has led to record high gold prices in yen...

So does record yen prices of gold mark the end of gold bullmarket? 

Well, again reference point matters.

The concurrent yen carry trade has been a partial fulfillment of my March 2012 prediction. The next phase is to see capital flight from Japan into ASEAN.

Moreover, real demand for gold has remained vibrant, as I recently pointed out.
Furthermore, despite the seeming underperformance of the price of gold, which I believe has been actively suppressed, this time through the US Federal Reserve communications strategy in portraying the tilting of balance towards the ‘hawks’, the string of record breaking activities as evidenced by record buying of physical gold and silver in the US (first 2 weeks of 2013), record ETF holdings of gold (as of November 2012) and record gold imports of India and China (fourth quarter 2012), aside from milestone third quarter rate of growth in the gold buying of emerging market central banks (third quarter of 2012), suggests of the blatant disconnect between gold prices and real economic activities underpinning the gold markets. Yes some Fed officials have openly been chattering about risks of price inflation!


Although there may have been some slight weakness in the demand for gold in India, these may have been due to the Indian government’s relentless “war against gold” via series of hikes in import taxes and other bank regulations.

This also imply that activities in the real economy and the financial markets have, like other financial markets, been operating in a parallel universe.


It’s also important to realize that prices of gold haven’t been isolated from the broader dimension of the commodity markets.

Since 1970, while there are may be differences in the degree and in the timing of short term fluctuations, the trend of commodity markets run in a general direction (black arrows).

Commodity markets rose during the stagflationary decade of the 1970 until the early 1980s, whereas globalization coincided with declining prices of commodities through two decades or until the outset of the new millennium 

The US Federal Reserve’s attempt to reflate the US economy in response to the bubble bust has generally lifted the commodity markets since 2003. Same commodities also went into a tailspin in 2008.

The above chart includes energy, industrials, precious metals, soft agriculture and the CRB Reuters index.

Are we seeing a broad based decline in prices of commodities today?



While Agriculture has recently been down (GKX) following an earlier spike, Energy (GJX) has been on the rise, along with the Industrial metals (GYX).

So there is little evidence to say that gold’s bull market may be at a close.

But there is one thing we can be sure of, there has been a massive build up of gold and silver shorts by US banks.


Albeit, gold shorts has been reduced along with declining prices.  But this runs opposite to silver where declining prices has led to increasing position on silver shorts.

Are the silver shorts sustainable?

Supply-demand imbalance will prove devastating to shorts, that’s according to Goldmoney’s Alasdair Macleod
We can be sure that the massive short position in silver is causing difficulties for the banks concerned, because of the lack of physical supply. Therefore, the bullion banks have an exposure which appears to be out of control. While they frequently conduct bear raids (which are more successful in gold) they face the risk in silver of themselves becoming victims of a bear squeeze. Unusually, they have got themselves into this mess on a low silver price, and it is roughly double the short position than when the silver price was over $40. This being the case, when silver turns up the banks are likely to be very badly squeezed, throwing up enormous losses. Meanwhile, the non-bank commercials have kept a level head and reduced their net short position by 2,268 contracts to 3,616.
I think this is right. But the collaborative heavy manipulation of the various aspects of the markets by global government could also imply that to paraphrase the deity of economic interventionism, JMKeynes, adulterated markets may remain intoxicated and irrational a lot longer than we can remain solvent. Nevertheless, eventually the fundamental laws of economics will prevail.
For me, gold’s recent weakness has been simply a revelation of the “reversion to the mean” or of the market truism where "no trend goes in a straight line".

Gold has been in a bullmarket for One, two, three, four, five , six, seven, eight nine, ten, eleven and TWELVE straight years, so a reprieve or profit taking should be natural reaction.
As I wrote at the year’s opening,
Although, so far, with the exception of gold, no trend has moved in a straight line, so it would be natural for gold to undergo a year of negative returns.

Nonetheless all these will also depend on the actions of monetary authorities.
Instead of merely chattering, it would be best for the gold bears to profit from their predictions by putting their money where their mouths are via shorting gold.

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