A Hard Rain's Gonna Fall

Gather round, goldbugs, wherever you roam, and admit that the waters around you have grown, and accept what my charts to me have made known, that a new trend is soon in the making.

The gold weekly chart closed last week again beneath the grey dotted line. That line, with the trend lines above it, had captured all of the weekly closing points since 2008. That suggested a sharp downturn ahead, but I admit today's quick bounce up back to $1650 surprised me. I noticed that the center trend channel (purple) is *exactly* 10% from bottom to top, and that, remarkably, the black trend line above it is also exactly 10% higher from the purple channel. So I drew an additional trend line (black) the same distance to the bottom of the purple channel, and it looks to me like the final line of support if gold is to avoid a sharp drop to the $1500's. I generally don't short gold, but if that line, at $1620, is broken, I probably will.


Similarly, on the daily linear chart (of closing prices), $1620 looks like an enormously important level, while Jim Sinclair's $1764 level (top of red wedge) would need to be cleared to suggest, as he has been saying for a long time, a parabolic move up.
On the daily log chart below, we see that we're right at a very important trend line as well, but this one has very little slack left. Interestingly, up until the steep Feb 29 correction (blue circle), which even Gartman suspected was orchestrated, it looked like gold was headed back up to the red dotted line in the center of the channel, which had captured the uptrend for years. However, that line lay dangerously close to $1900, and it seems quite possible that such a move, given that a "double top" already occurred, would've led to a parabolic move, even before any QE announcement. So it's very possible the price is being "stepped on" down here around $1650, a level which Sinclair, if he is to be believed, says central banks are "comfortable with." It remains to be seen, though, if gold can be pushed beneath its long term trend channel (blue). Once again, we will find out very soon.
Here's the $GOLD:$USD chart, which can be interpreted as the purchasing power you have outside the US if you convert your gold into dollars, and then those dollars into a basket of foreign currencies. I think this is an important chart, because it interprets gold as the ultimate currency. Here too, a resolution is approaching. The pattern here looks bullish to me, as it has drawn a fairly perfect inverse head and shoulders.
Last week I noted the $CCI chart had painted the right shoulder of a perfect head and shoulders pattern as well. Alas, that "shoulder" didn't hold, and now we are approaching the low of last December, which had previously been hit (and become support) in late 2010, hard upon the QE2 announcement. Note that there is immense support at this level, as it marks the Fibonacci 61% retracement from the 2008 nadir (red lines), and also touches the lowermost "blade" of a Fibonacci fan (blue). With RSI in the low 30's, this chart looks very bullish to me in the short-term.

Here's the $GOLD:$CRB chart, which I take to be a measure of how badly the market wants a safe haven (since it is "adjusted" for mere inflation, which all commodities benefit from). Unlike the $CCI last week, the inverse head and shoulders here did not break down and appears to be steadily approaching the uppermost red line.

Silver is hanging in there, stubbornly resisting a fall into the pink zone, though it has been nudged into it by a hair. That suggests $30 will be tested.

However, the "10-year US Treasury yield in silver" chart is keeping the ball in play.

I think we're on the verge of some dramatic movements.

45 comments:

Robert LeRoy Parker said...

Waiting for that waterfall decline in pog.

Warren James said...

I'm bullish. If my theories are sound then the price will bounce off that black/blue bottom line. But my ideas are taking on lots of water at the minute. Thanks GM for the charts & the chartly warning.

lords said...

Hi
How accurate can technical analysis be?

I am not a trader/pro investor, but put a big chunk of money into Precious metals a few years ago.

Forgive my ignorance and heresy, but graphical analysing charts of what has happened, seems a terrible way to try and predict what will happen. It seems nutty . Like reading tea-leaves etc.

Is there solid evidence that technical analysis is of value?

GM Jenkins said...

RLP, I agree that patience here is a virtue. After Friday's depressing action I was thinking waterfall as well, but I've been impressed by the resiliency last night (and even currently) (as well as the surprise jump last Wednesday that bespoke big buyers comfortable at these levels), so now I'd say I'm closer to Warren's stance, cautiously bullish. But no-one should be surprised at a drop even to the $1400's if some of these important trend lines are broken. The repeated KWN claims that there are big physical buyers at $1710 or $1680 or $1600 putting a floor on the market should be taken with more than a grain of salt (interestingly, it appears Eric King has pulled interviews from Feb and March: http://www.kingworldnews.com/kingworldnews/Broadcast/Broadcast.html, perhaps because of so many such erroneous claims that the Chinese or whoever wouldn't let prices drop below imaginary floors.)

lords, I agree that TA is a lot like reading tea leaves, and has very little scientific rigorousness to it (at least how I do it, anyway). However, there are ways in which it's useful: (1) so many people use it, including hedge funds that do algorithmic trading based on them, that you can get self-fulling predictions; (2) apart from that, charts capture real mass psychology, such as why resistance becomes support (or, e.g. the "double top": as an aside, last fall I was cautioning someone who was interested in buying Illumina, since I saw a douple top forming, and I was explaining to him the psychology behind it, when another amateur investor friend came into my office to tell me he had just old his ILMN shares, saying he felt he missed his chance the first time, and was happy to take profits at that point); (3) apart from capturing psychology, charts (especially long term charts, which I almost exclusively use) capture trends visually, trends based on fundamentals, with their linear/exponential growth patterns, that are otherwise resistant to simple mathematical analysis because of random short term fluctuation; (4) whereas the past isn't *necessarily* a predictor of future events, charts do allow you to say something like: "if X happens, it will be the first time in Y periods that this is so"; e.g. I used to mention the 144 day MA in gold as strong support, because if it broke, it would be the first time in 3 years (or so) and 6 attempts (or so) that that would have happened. In general, it's a good idea to assume "things aren't different this time" and to bet accordingly, and TA helps you do that, if only to hedge your position that is more fundamentals-based. Of course, things sometimes *are* different, and indeed, the 144 day MA is no longer useful (though, perhaps as future resistance, see (2).

Warren- I'm on Australian time again - we should chat sometime ;)

Kid Dynamite said...

just a word on technical analysis - I'm no chart worshipper, but it's important to understand why basic principals like "support" and "resistance" have value: they are visual depictions of basic human psychology... ie, support, to me, is:

"oh man - I wish I'd bought that stock last time it hit this level - I was so annoyed when it rallied hard and I didn't own it.. if it gets back there, i'll buy it next time"

resistance is the opposite...

markets are driven by psychology, which is why these concepts are important

lords said...

Thanks for the explanations.

Jeanne d'Arc said...

Jeanne is in the basement,
Mixing up the amalgam,
GM's on his ottoman,
Thinkin' about the government,

Wynter in a trench coat,
Caught out, sodded off,
Said he had a bad graph,
Warren had to finish him off,

Look out Kid,
Keep your Dynamite hid,
Sprott knows when,
But you're pwning him again,

You better keep goin' Louis' way,
Lookin' for the new trend,
Go follow the lemurs' map,
Not the pump men,

Hidin' gold in the hills,
Cursin' poor Uncle Ben.



And that's all I've got to say on the matter. Thank you.

GM Jenkins said...

Go follow the lemur's map/Not the pump men

Love it!

AG said...

I'm confused, do the authors of this blog believe that the PM's (or is just Gold?) price is manipulated or not? How relevant can TA be in a manipulated market?

GM Jenkins said...

AG, I can only speak for myself. I am convinced that a disorderly rise in the price of silver and gold is anathema to the interests of the banking class, and that the Fed (and institutions such as the BIS) exist primarily to defend those interests. As such, these "vipers and thieves" (to quote Andrew Jackson) will do whatever it takes to preserve their unjust status atop the totem pole, and that includes manipulating the prices of gold and silver (and any other asset) when the benefits outweigh the potential costs. The extent to which the benefits outweigh the costs is an open question.

"Relevance of TA" is a function of many independent variables, with "extent of manipulation" (whatever that may be) only one. Moreover, for any value of "extent of manipulation," I can argue that TA becomes more or less relevant depending on the value of its other determinants. So I think the argument "there's heavy manipulation so TA is irrelevant" is incorrect.

victorthecleaner said...

GM Jenkins,

perhaps because of so many such erroneous claims that the Chinese or whoever wouldn't let prices drop below imaginary floors

This claim does not make a lot of sense. If you believe that China buys physical, then they would not put a floor under the paper price, but rather receive more physical for the same amount of US$. So the Chinese government has no incentive to support the paper price.

On the other hand, the Fed and USG do if they want to keep the game going in spite of strong physical buying. If there is ever a risk that the BBs run out of physical reserve, it is very plausible to see the USG or Fed buy paper gold rather than sell it.

Not go and tell this to the people at GATA.

It would also make some sense for the ECB to support the paper price if they accept the fact that the system keeps running and at the same time want to make gold look attractive as a hedge.

Victor

GM Jenkins said...

So, Victor, are you saying the Fed wants prices to go up (but, presumably, in a steady and controlled manner), whereas the Chinese (and other emerging market nations) want the price to go down? Interesting, if true, and entirely plausible. What's your view on manipulation in the silver market? Do you think Bart Chilton is full of crap when he says "“There have been fraudulent efforts to persuade and deviously control that price"?

Warren James said...

re: 'is gold manipulated?', yes absolutely. BUT ... the question itself (and the associated answer) is way too broad, and I think this leads to confusion around the discussion. In my unprofessional estimate, there exist at least 10 different forms of price manipulation. They all have vastly different scales of time frames, stakeholders, motivations and mechanics, not all of which will be directly relevant to the observer's frame of reference.

High Frequency Trading Quote Stuffing is a great singular example of what I'm describing here. By definition it is designed to alter and influence the price to further a specific objective (hence 'manipulative') but depending on the analysis it may or may not be relevant to the observer (e.g. if looking at a decade-long trend).

As Kid Dynamite has written above, market psychology is a known element in the market chemistry, and to that extent it can be relied on to create price movement - again the direction and magnitude depends on the motivations, mechanics, time frames of the stakeholders (for example you might be able to guess where people have their stop losses set, and nudge the price sufficiently to trigger them).

The complexities which make up our modern world run pretty deep so tracking all those elements is an incredible labrinth of human culture, biology and politics.

I like my interpretation because it automatically accomodates many different manipulation theories (none, down, up), including what GM and Victor are talking about above.

Bearing in mind that trading is different from investing, the best comment I’ve ever seen on the manipulation issue is from Adam Brochert’s March 3 subscription-based newsletter:

"I wanted to talk about market manipulation. The internet is buzzing with talk of the precious metals (PM) raid this week and it did seem to be such an event. All markets are manipulated depending on how you define it. Whether it’s stopping plunges, bear raids on “unsavory” items that are going up, currency manipulation, ignoring the laws for certain players or just changing the rules midstream (among other forms).

All I can say to those who spend a lot of time dwelling on such items is this: c’est la vie (such is life). I am no political activist looking to reform the system via protest and political participation. Once you know markets are manipulated, you can either accept it as yet another risk of trading or just stop trading. Much as with a casino, the rules are stacked to make sure “the house” always wins in the end. Those of us trading are trying to be the exception to the rule and most of us will fail.

Manipulation cannot create or change the primary trend; it can only change its speed and/or distort it. So I don’t worry about market manipulation derailing the PM bull market, but I do acknowledge such manipulation exists and that it is a risk of speculation. I used to get mad, now I just plan to get even by taking more money out of the markets by trading smarter and using good risk management. My revenge will be to profit despite the stacked deck (at least, that’s the plan).

On a final note, I am no insider and have no actual knowledge of whether or not this week’s plunge was an intentional market manipulation. It just as well may have been some panicky liquidation by a hedge fund or wealthy gambler with a margin call. Once the first big fish panics, the stops get tripped and the traders/machines/computers take over by selling first and asking questions later. In the end, it doesn’t matter and doesn’t change the long-term picture. A strong core position in physical metal held outside the banking system means that any short-term drawdowns in your trading account won’t affect your overall financial health enough to matter. This is also why trading profits should be used to expand a core metal position or diversify into other long-term investment(s).
" -- Adam Brochert, 3rd March 2012

S Roche said...

Good commentary, thank you.

The price spikes in gold that led to the Feb 29 beat down, (from $1920 high Daily Fib Fan 78.6% to FF 61.8% dot to dot) started in the NY Access market, the usual scene for notorious beat-downs.

The "Asian market" had not been providing any price surges in the "Overnight Trade" so the bears took it upon themselves to spike the price to set up the Feb 29 waterfall, imao.

If Bernanke can manipulate the bond market, then all sorts of scamps and scalliwags can manipulate gold, both ways, in the short term.

For those who doubt TA, just draw some Andrews Pitchforks and Fibonnacci Fans and come back a few days/weeks later to see how it went...you'll convert.

GM Jenkins said...

re: 'is gold manipulated?', yes absolutely. BUT ... the question itself (and the associated answer) is way too broad, and I think this leads to confusion around the discussion.

That's an important point, because it's probably better to take Brochert's view on manipulation ("c'est la vie") than to be fooled into believing a false or cartoonish version on scant evidence, which, in addition to being unjust to the parties being scapegoated, will also ensure that the true causes of manipulation remain better hidden and more effective.

Still, Brochert's argument seems too nihilistic for my tastes. Manipulators are parasites. An entity, whether an organism or an economy, that ignores its parasites will soon be at their mercy. As we are.

I sense a lot of subterfuge, misinformation, and bad faith in the official and mainstream discussion of gold and silver. I don't know exactly what that implies, but I do suspect that fiat currencies would quickly lose their value if gold and silver were allowed to function alongside of them as legal tender (as the Constitution requires).

By the way, it's absurd to ask whether fiat currency is good or bad, without also asking for whom? The dysfunctional underclass of government teat-suckers, the sociopathic financial terrorists, politicians, warmongers, etc., win in a world without sound money.

victorthecleaner said...

GM Jenkins,

Do you think Bart Chilton is full of crap

No, I can imagine he is honest and tries his best. He may have been overrun by the silver conspiracy mafia though and issued a public statement although at that time, he hadn't fully understood how the market works.

This is related to the discussion that the OTC market is roughly a factor of 8-10 bigger than the COMEX (I mean the paper market, i.e. both allocated and unallocated OTC and futures on margin, whether closed or delivered on at the COMEX).

So it is plausible that the real action happens in the OTC market, and the OTC market pushes around the COMEX. How? There are a few arbitrageurs sitting between the two markets who transmit the price action from OTC to the COMEX. How does this look like? Someone suddenly shorting some 20 tons of gold in a microsecond, capturing a tiny price difference.

So what Ted Butler calls manipulation is in fact arbitrage.

Of course, this leaves open the question of how fishy is the OTC market, but that is a question that nobody between GATA and the Turd asks (for lack of knowledge of said OTC market or for mere show effect)

Victor

victorthecleaner said...

GM Jenkins,

the Fed wants prices to go up

No, not necessarily. A rising gold price would cause a rising oil price, and they might try to avoid that, at least for now.

But if the choice is between the BBs running out of reserves (and the gold market going belly up) and raising the paper price, then, yes, they would prefer to raise the paper price.

Victor

S Roche said...

Victor The Cleaner,

"There are a few arbitrageurs sitting between the two markets who transmit the price action from OTC to the COMEX"

Well, I asked about this (again) on Turdland just today.

I would have thought that the Comex (dumping) would transmit the price to the London Fix to enable allocated delivery at a more favorable price...I would very much like to understand the mechanism by which the Globex/Nymes markets interact with the LBM, any suggestions would be appreciated.

AG said...

GM Jenkins,
Thanks for the reply and explanation. It has been documented by some that there are huge instant sell orders on the COMEX in regards to Gold (and Silver also). Just recently an instant (HFT?) sell order came in for 6000 contracts of Gold (aprox 15 metric tonnes) that moved the price over $7. What kind of seller acts on such volume in disregard for price? Is this a real physical sale? It has been said that such orders are used to trigger stops and initiate a selling cascade and these contracts are bought back at a lower price, avoiding any correlation between a paper sale and its physical counter part. Your opinion?

SilverIsKing said...

If the price of physical remains artificially suppressed due to paper shorting, the physical supply will eventually be depleted. That is when they will no longer be able to control the price via paper manipulation. It works...until it doesn't.

victorthecleaner said...

S Roche,

I would have thought that the Comex (dumping) would transmit the price to the London Fix to enable allocated delivery at a more favorable price

I'd say it is the opposite. There is selling in the OTC market (for a reason we don't know). One of the BBs that's active both OTC and at the COMEX sees that gold is suddenly cheaper OTC than at the COMEX (where nothing has happened), and they capture the arbitrage by buying OTC and selling at the COMEX.

What this argument says is in effect that COMEX is a bit slow in relation to the OTC market so that the arbitrage actually happens (in an ideally efficient and transparent market, the COMEX price would drop by adjusting bid and ask without any trades being executed). But that is plausible because the OTC market is so intransparent.

Victor

S Roche said...

Thank you Victor,

I accept what you say but leaves me wondering that the LBM operates without any of the "benefits" of an electronic trading system (this seems unlikely, I read that the members of the Fixing put up a flag...really?) and this antiquated form of trading is still 10 x Comex, with its HFT and nr 24 hr access...

Dark pools indeed. I hope I live long enough to see 1968 redux.

Slow Loris Larry said...

Here is a somewhat different take on the effect on the gold markets of alleged Chinese buying of gold in quantity, using their enormous and probably soon to seriously devalued dollar holdings.

The assumption I am making is that they (the People's Republic of China, probably working through their state owned banks) are aiming to accumulate as much gold as they can, as quickly as they can, but without unduly distorting the markets. So, they have to proceed deliberately and consistently. That means that they are not particularly concerned about the price they may pay on any given day, but only with their average purchase price over a year or so, if even that.

It would appear that they are now accumulating physical gold at a rate of 600 tons per year, perhaps more, which would come out at 3 tons per market day, more or less, but it could be as much as 5 tons, or even more. Where can they get that much gold per day on a regular basis? Not from the COMEX, for certain, as 1) physical settlement of their futures contracts is irregular and fluxuates hugely from one month to the next, and 2) the COMEX simply is not a big enough market to supply that much gold, even over the course of a year. No market in Asia comes close to even the COMEX.

So, that leaves the LBM and its associated OTC trading. I will try to address such things in a posting that is 'in progress', but for now let me assert that the LBM, etc., is the only 'place' where physical gold in large and steady quantities can be obtained.

Comments on some PM sites you will be familiar with have asked why would the Chinese support the market at present prices instead of waiting for it go go below $1,600 or even to $1,500, and then buy up as much as they want?

Why? Because it they did, it would bunch up their buy orders and disrupt the smooth flow of physical settlement in loco London. In fact, storing up a week or two of their demand, which could involve up to 50 tons, would probably immediately force the price up and over what it had been when they stopped their regular buying.

So, how long will they continue to make such 'slow and steady' but meaningfully large purchases? As long as their surplus dollars are still acceptable by those with gold to sell, even at MUCH higher prices. For the sake of argument, say that they are willing to spend $1,500,000,000,000 of their excess dollars for gold, which at present prices would eventually get them nearly a billion ounces. or 45,000,000 tons, which are of course absurd numbers. But what they do show us is that they could really care less how much they have to pay per ounce to accumulate enough to rival the combined holdings of Euroland or the claimed 'deep storage' holdings of the United States.

Slow Loris Larry

PS. If S Roche would contact me via Jd'A or Warren, I would appreciate it.

victorthecleaner said...

S Roche,

the LBM operates without any of the "benefits" of an electronic trading system

Oh, it's almost all electronic. If you get hold of someone with a Bloomberg or Reuters terminal, you see that the major banks all quote a spot unallocated contract plus 1,2,3,6,12 month forwards. Even some discount brokers (not 100% sure if Interactive Brokers is among them) offer you to trade unallocated on margin. If you do this, then you are part of the OTC market of the 'big boys' - but your counterparty is only your broker. In order to trade OTC with the banks, your company needs to be ISDA member I guess (that contains the procedures for collateral enforcement etc.).

The official fixing has a relevance similar to the 'discovery' of LIBOR. It is a benchmark that many other contracts use without asking any further questions. The arcane procedure with the flags was only 'for show' and only as long as Rothschild presided. When Rothschild closed their LBMA activities and Barclays took their position, they switched to a telephone conference.

Victor

victorthecleaner said...

Slow Loris Larry,

COMEX simply is not a big enough market to supply that much gold

COMEX is not made for delivery. The delivery option exists only to 'threaten' with arbitrage, not to actually ship physical. The second issue you have is that COMEX has the wrong bars (100oz) which is not LGD (400oz).

If you want larger quantities, you might actually avoid the banks altogether and directly get in touch with a refiner or even with a mining company. I am not entirely sure, but I guess that when you buy from a refiner or from a mine, you could get a contract for 3 or 6 months and pay the average London spot price over that period. If Bron is here, he might be able to confirm or to correct me.

Finally, the Chinese have a reputation for never running the price.

Date: Sun Oct 12 1997 10:42
ANOTHER (THOUGHTS!) ID#60253:


What looked like big money before turned out to be little money as some HK people, I'll call them "Big Trader" for short, moved in and started buying all the notes and physical the market offered. The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money.

and you need to know who 'Big Trader' was

FOA (10/26/01; 21:21:33MT - usagold.com msg#127)
A few comments on comments!


The HK / China central bank system, also known as Big Trader, [...]

Victor

S Roche said...

Thank you Victor,

"Similar to LIBOR"

I must check up on how that LIBOR-fixing investigation is going...but the metals trade free, right?

What a funny old world!

victorthecleaner said...

Similar to LIBOR refers to the use of the benchmark, not to the way it is determined.

But I think you are totally on the wrong track. You are desperately searching for someone who manipulates the price downwards in the short run.

This misses the point in my opinion. The price of gold is "too low" because what is traded is not only physical gold (allocated), but also gold debt (unallocated). This is essentially ECON 101. Expanding the money supply (physical plus credit gold) creates price inflation (lowers the gold price relative to other things including US$).

So you should ask who is so 'stupid' as to hold unallocated gold (or who is long the future on margin which is equivalent to this up to a swap and a spot transaction) - because that's the person to blame, i.e. the one who causes the price to be 'artificially low'.

Once the investors or savers stop trading on margin and/or request allocation, this will automatically be rectified.

The meme spread by basically everyone from GATA to Ted Butler that the COMEX were manipulated, serves only to distract from the true issue.

The true issue is that today's OTC gold market has all the features of a gold standard, i.e. cash (=allocated) and banks (=the OTC market) that lend gold (=unallocated). What's funny about this gold standard currency is that it has no territory, that only banks, hedge funds and some mining companies and refiners trade in this currency and that some of them are paid to dig more cash out of the ground.

Since the OTC market is basically equivalent to a little gold standard, it shares the key flaw of the gold standard, namely that it undervalues physical gold because credit is accepted as equivalent. The problem is that gold is being lent.

If you are curious now, then you should read this:

http://victorthecleaner.wordpress.com/2012/03/18/how-credit-suppresses-the-gold-price/

Victor

S Roche said...

Victor, some of what I wrote has a nuanced wry grin to it that didn't quite come across in print.

Thanks for your further comments, I have read about Alice & Bob several times. I understand the credit effect, having a day job as a realtor...

I watch the gold price obsessively and I can see evidence of short term manipulation both ways. Incidentally, I believe this is done through large transactions at key technical levels in order to signal intentions and initiate piggy-back trades. Therefore, my aim is to understand the mechanics of the interaction between the LBM and Comex, and you have helped me with your comments above.

Thanks again.

victorthecleaner said...

S Roche,

sorry - I wasn't able to see the expression on your face when I was reading your text...

Here is another question about the OTC market you are interested about. I have used some old rule of thumb in order to estimate the total volume of unallocated gold (the idea is to measure the velocity of credit gold at the COMEX and then extrapolate to the OTC market and use it to estimate the OTC open interest from the OTC trading volume). You get a range of 1500 and 5500 tons in open unallocated position OTC.

Now you can assume that the banks are neither short nor long gold in US$, but that they only borrow and lend. This raises the question of who holds the opposite position of all the unallocated balances, i.e. someone
a) has borrowed gold and owes the bank ounces (as opposed to US$)
b) is short unallocated
c) is short the forward

Although the hedge books of the major mining companies have been closed years ago, I suspect that there are still mining companies who borrow money from the BBs and that some of these loans are payable in ounces. But I doubt this is enough to explain the aggregate OTC position through (a).

So what else is it?

Victor

S Roche said...

Victor,

Well, that is an essential question and your volume calculation is intriguing.

My first* thought is to check the disclosure requirements of the miners, given their share price performance (!) and their rising input costs and their mentality, ie, the 1980 bogeyman, as well as how the volume might tally.

I know someone who could make a very informed guess or certainly has access to people who could, but I want to be fully up to speed before asking. Any additional information or lines of questioning to pursue would be appreciated.

I will follow up on this thread as I glean more, thank you.

*OK,ok... that was my second thought...my first impulse was, of course, the hangover from the Robert Rubin/Larry Summers induced Clinton Era sales of US gold giving us TBTF banks acting under state agent immunity to suppress the price...

Slow Loris Larry said...

Let me chime in on the edifying dialog between S Roche and Victor the Cleaner, who obviously knows a great deal about the precious metals markets, as it was sparked off by my post on possible Chinese gold buying intentions.

Like S Roche, I am intrigued by the relationship between the COMEX and the LBM in terms of how the 'spot' price of gold (and silver, of course) are 'established' on a round-the-clock basis.

There are still a few pieces of the puzzle to get in place before I am ready to post another article, but for now let me point out the following, most of which I have gotten from Paul Tustain's recent interview by Chris Martenson (http://www.chrismartenson.com/blog/paul-tustain-be-wary-balance-sheet-risk/73604), which largely recapitulates some of his earlier articles (http://goldnews.bullionvault.com/user/paul_tustain), as well as from correspondence with Bron:

1)Much, but not all, of what many see as market manipulation can be explained more parsimoniously by big market participants more or less legitimately seeking and making profits.

2) Many OTC transactions between buyers and suppliers (miners, but more often probably refiners, and central banks or other sellers in size) do not involve the LBM directly, but the parties on both sides do enter into associated unallocated contracts on the LBM to hedge their deals until final settlement.

3) Such forward contracts for unallocated gold do not need to be for set intervals, like three or six months, but can be for any date the LBM is open. Physical metal settlements are also done on a daily basis, but always at least 48 hours after a deal is done in order to allow for the physical delivery.

Finally, just a comment on Victor's reference to the 'Big Trader'. The time FOA wrote that was a the end of two decades of falling gold prices, when the Chinese were just beginning to amass their huge dollar surpluses. Now, at the end of over a decade of seriously rising gold prices, the 'Big Trader' seems to be committed to acquiring a very substantial gold holding rivaling that of major European holders. Of course, they don't want to spend any more than they have to in doing so, and perhaps they are the ones behind the takedowns on the COMEX, but I am still convinced that they will keep on buying no matter how high the price goes until they think they have enough to back the RMB as part of a new international currency system.

As a postscript, I wonder if anyone can tell me what the US means by saying that much of their gold is in 'deep storage'. Just how 'deep' would that be? Still in the ground waiting to be mined?

Slow Loris Larry

S Roche said...

SLL

Seek and ye shall find...

"The Deep Storage gold is held in vaults at the Fort Knox, West Point, and Denver Mint
facilities. This gold is in sealed vaults that are not disturbed except for periodic gold
audits conducted by the Treasury Office of Inspector General."

http://www.governmentattic.org/docs/US-Mint_Overview-Accounting-US-Gold.pdf

FOI request.

S Roche said...

and here are the numbers at Mar 31, 2012

http://www.fms.treas.gov/gold/current.html

Robert LeRoy Parker said...

Hi Larry,

According to Another the Chinese likely found out about the alleged Saudi gold accumulation sometime in the early 90s and were a major reason that the Lbma supposedly got out of control by the late 90s.

My guess is they have steadily been accumulating for the last 20 or so years and buy as much as they can without running the price. They don't need surplus dollars to do this though as they can simply print yuan, buy dollars, get the gold and maybe even help their exports at the same time. They probably don't even need to buy dollars and could just use yuan. As long as they don't run the price or blow up the LBMA, the total expenditure is unlikely to do much to their currency given the relatively small size of the gold market.

If Another is to be believed, I doubt the Chinese will ever "have enough" and stop accumulating. I think they will get the cheap gold as long as they possibly can without forcing an IMFS transition. They may be sending the states a lot of stuff for treasuries, but at the same time their economy and standard of living has come a long way since the end of Bretton Woods. I think the Chinese may view it as in their interest to keep the status quo for as long as they have continued increased in the quality of life.

I read a couple days ago they are buying treasuries again.

Slow Loris Larry said...

@ S Roche

Thanks for the links to the official US Treasury statement and figures on the official US Government gold holdings. My curiosity on the matter is now assuaged, and I apologize to all concerned if in my ignorance I cast undue aspersions on the matter of 'deep storage'.

S Roche said...

James Turk's curiosity was not assuaged at the time, it was piqued ... apparently there were some unexplained changes of terminology ending with the term Deep Storage, then Gold Swaps were mentioned at a FOMC (contradicting UST's statement that they do not engage in same), then there was a denial that the words said were transcribed correctly, and then...my head hurt.

http://www.fgmr.com/what-is-happening-to-americas-gold.html

victorthecleaner said...

I'd like to caution and recommend not to take Turk too seriously - he got it wrong too often.

The deep storage issue was discussed here:

http://fofoa.blogspot.ca/2010/10/flow-addendum.html

Just search 'deep storage' on that page.

If I may add my two cents. According to international law in effect today, the foreign dollar holders still have a claim on the US gold reserve at $42.22 per ounce.

It is quite obvious though that the Fed will never be able to defend the dollar, not even with gold at its current London price of $1650.

I view the terminology 'deep storage' as a hint that this gold will not be used to defend the dollar, but it rather forms the initial capital for whatever comes after the present dollar. They will let the dollar go down substantially before this gold is back onto the poker table.

Just for curiosity, people noticed that the British gold was transferred from the Bank of England to the Treasury over the previous years. Perhaps we have another one who is now of the view that their currency can no longer be defended.

Victor

Slow Loris Larry said...

@RLP

I agree with almost all of what Another, FOA, and you say about the Chinese and gold. The only point I would quibble with would be your idea that they don't need dollars to buy gold as they could just print Yuan to buy dollars to buy gold, and could probably even just buy gold with Yuan..

Firstly, the Yuan is not a freely traded currency. It is still a managed currency. Who on the LBM would, at present anyway, sell physical gold for Yuan? Not many, in my opinion.

Secondly, the Chinese are already printing heaps of Yuan, much of it to buy up US Dollars (and Euros) earned by their exporters, which is highly inflationary, internally. They have also, post 2008, printed up more Yuan, proportional to their GDP than the US Fed has, in order to stimulate their economy through loans mainly to local governments which cannot be repaid as the funds were squandered on mal-investments and corrupt payments to local government officials. This is also highly inflationary, internally.

Thirdly, Chinese foreign currency reserves are now in excess of 3 Trillion in US Dollar equivalents, and probably include at least 2 T in US Dollars, per se. They really don't know what to do with all of them, since they really do not want more US Treasuries, and cannot seem to spend them faster than they continue to accumulate them. Therefore, they will use them as quickly as they can to accumulate gold.

Of course, they are in a bit of a quandary. They, like anyone would, want to accumulate physical gold as cheaply as they can, but they also want to accumulate far more gold than they already have, even if they probably now have more than twice the amount of their last official holding of just over 1000 tons. They need to accumulate steadily, even as the price goes up significantly, but of course can't afford to create a disorderly market. So, I agree that they will still be buyers even when the price of gold is around Alf's predicted figure, provided that it seems to have stabilized, or just paused, at that level.

By the way, if you could point me to a source for what happened to the LBM in the late 1990s, I would appreciate it. Having been big in silver in the late 1970s, I was not yet back on the PM scene until the mid-2000s.

Slow Loris Larry

victorthecleaner said...

SLL,

perhaps I may (I know I am not RLP, and I am not an insider either).

A brief summary of what I understand is as follows.

1. Until 1990, there must have been some agreement between BIS and oil (Saudi Arabia, perhaps others) on the gold/oil ratio. This "went out the window after the first Gulf War" (Another)

2. After GW I, the BIS central banks developed the London gold market (includes establishing fractional reserving) in order to expand the credit volume of gold and in order to manage the price down to a bit over production cost. The falling price encouraged many private holders to sell. At the same time, the mines (Barrick!) were given cheap loans that were payable in ounces, and on top of this, they were encouraged to hedge their future production. The hope was to keep the US$ price of oil low until the introduction of the Euro by offering the oil countries cheap forward gold.

3. This was a low risk scheme because the mines were digging out the real gold, and so they would be able to cover irrespective of US$ price. Then, however, others got into the gold market, for example hedge funds interested in the gold carry trade (going outright short paper gold). The Greenspan quote "central banks stand ready to lease gold in increasing quantities should the price rise" (from memory) belongs into this phase. What GATA usually don't quote is the response he gave when they asked him whether it was the U.S. who were leasing gold. Greenspan said no, but he knew it wwas be others. (I don't remember whether he said it was the Europeans).

4. Also, the Chinese figured it out. Another calls "some HK people" 'Big Trader'. Later FOA says this was the Peoples' Bank of China (who, before the return of HK to China, apparently operated through some private company in HK). If you read only 'Another (THOUGHTS)', you have the impression that the Chinese got in by chance, started buying physical in South Africa and paper in London, and upset the gold-for-oil scheme, and Another certainly seems no to like this. When you read FOA about the 'master plan' some 3 years later, you might also think that the Chinese were let into this deal deliberately.

...

victorthecleaner said...

...

5. In mid to late 1996 it became apparent that the gold-for-oil scheme would blow up because the oil states and China had bought too much unallocated and forwards, and the European central banks started selling some of their own in order to bridge the gap until the introduction of the Euro.

6. In January 1997, the LBMA went public with their trading volume. What these numbers revealed for the first time, was that the London gold market was a currency market, i.e. with cash, credit, debt, swaps and forwards. In fall 1997, 'Another' appears with "oil and gold never flow in the same direction".

7. During 1997-2001 the London gold market comes close to blowing up several time (much worse than anything ever since - including 2008/9). You can see this from the GOFO plots using the data from the LBMA website.

8. There must be several paper gold shorts who blew up during this period, and LTCM was apparently one of them. There was a rumour that LTCM was short 400 tons (paper) which was denied by their chief legal counsel (none other than James G. Rickards!). But you can see the LTCM failure in the GOFO chart, and so I am inclined to believe the rumour. There were also rumours that (1) LTCM was rescued in order to save the London gold market; (2) the Fed lowered interest rates in order to bust LTCM (they were all betting on rising interest rates with the introduction of the Euro in 1999) because they wanted to get rid of the carry traders. These rumours obviously contradict each other, and I have no data to support either.

9. The Euro was introduced in January 1999. At that moment, the Bundesbank said 'No more leases' and 'no more sales'. The London market is in serious chaos, and after lobbying for gold sales by the IMF which does not pass because of the US Congress, the Brits start selling half of their own gold (Brown's bottom), but only to LBMA institutions.

10. The European central banks more or less walk away from the gold market (with anything between 10000-14000 tons of unallocated position still open). This was a serious threat to the U.S., UK and the dollar. In September 1999, they pass the 'Washington Agreement on Gold' in which they agree to sell an already agreed amount of gold, but not more, and not to engage in any further leasing.

....

victorthecleaner said...

...

11. Dimitri Speck has got the vault inventory of the custodial gold held at the FRBNY. From these data, you see that most of the physical gold was removed from the vault before 1999. So the sales agreed on in the Washington Agreement are most likely final sales of gold that was on lease and that the bullion banks were unable to recall. Note that the Bundesbank recovered all of their leased gold (about 360 tons of their 3600 tons). The quote by Edward George (as claimed by Reginald Howe) "On that day we looked into the abyss" and "The BoE was very active in bringing down the price of gold as was the Fed" (from memory) dates one day after the Washington Agreement. This was the day with the highest gold lease rate in history.

Note that the Eurosystem has gold in line 1 of their balance sheet, before foreign exchange reserves. The Washington Agreement said "Gold will continue to be an important international reserve". This is a frontal attack against the US$ world.

12. So the movement of physical gold out of the vault ended in 1999-2001 precisely when the Euro was introduced and precisely when the price of gold in US$ started to rise.

13. Apparently the Euro people were waiting for oil countries to switch their exports from US$ to Euro. I think you can see from the data that many diversified their reserves from US$ only to some US$ and some Euros, but none of the big oil exporters has switched as of today. But note that the oil price in US$ is rising in parallel with the gold price in US$.

14. Another date that seems to be relevant is a week in May 2001. During this weeks' COT, the position of the "Large Commercials" at the COMEX (which, in my view, indicates arbitrage between OTC and COMEX) reversed. The short position everyone is talking about originates from this day. This is also pretty precisely the begin of the increase in the US$ gold price.

Victor

Slow Loris Larry said...

@ Victor

Thank you SO much for your comprehensive reply to my appeal for information on the LMBA situation in the late 1990s.

It was certainly a critical period in the development of the situation in which we find ourselves now, and the information you recounted helps my overall understanding of the gold markets tremendously.

It was very generous of you to take the time to enlighten us all on the historical situation.

Slow Loris Larry

victorthecleaner said...

Before I get too much praise for this, I should say that I am not an insider (that must have been exciting if you were on the right side), and that this is just what I understood from the gold trail.

There are hundreds of little items that you can verify independently by the way.

Victor

GM Jenkins said...

Seriously, Victor, you tha man! Thanks for putting the time into all these explanations.

Robert LeRoy Parker said...

Hi Larry,

I'm of the opinion that there is a very large amount of money that would like to add remnimbi as a means of diversification, especially those of the opinion that the long term outlook of the dollar is not good. My understanding of the now extinct PAGE concept was that it simply offered a means of obtaining remnimbi exposure through gold.

At the current price of gold, big money still needs FX for diversification beyond physical goods, real estate, stocks, and term debt. In my opinion it would be wise to choose currency from a zone that is both running a surplus and increasing it's gold reserves, China being one of them.

Of course there is political and moral reasons to object to this course of action, but in the end the bottom line tends to make the final decision.

Victor,

Nice summary. I would add that about 400 tonnes of IMF gold sales did go through in late 99-2000 under the pretext of their baloney developing nation loan assistance program.