Paper gold sellers (probably banks like HSBC or JP Morgan) decided (jointly?) to hit the market hard on April 12 and 15, and on June 20 and 26, with so much selling that the effect on the price had to lead to a brutal collapse. On those four days of smashdown, the price of gold fell by $340! It should be noted that there was no particular news that could have explained such selling spree. It was like it had been announced that someone had discovered 30,000 tonnes of pure gold in South Africa! The goal of the sellers was to produce the maximum of fear and terror on the gold market at a time when the Fed’s printing press was overheating by producing the equivalent of 20,000 tonnes of gold in new electronic dollars!
Each time the price would reach retracement levels sellers would appear, very often outside of the main COMEX market, to systematically smash any rally and, incidentally, trip many circuit breakers, their heavy selling being too big and drying up the market entirely. All those suspect moves on the paper gold market, very seldom seen during previous years, have led many observers to state that the gold price has been manipulated.
So were there interventions by the Fed in the gold market (via a bullion banks cartel) or is the fall in the gold price only due to a side effect of a market drunk on QE and becoming a bubble?
In a world where a central bank is permitted to control more and more variables with « exceptional measures for the economy », why not accept the fact that the gold market is just another variable to be controlled among others? Technically, the price manipulation via the COMEX and the other paper gold markets can be easily achieved by a determined bank cartel. These bullion banks can go on until the physical gold market suffers dwindling supplies due to a price that would be fixed too low. But until then they will be able to recuperate some physical gold from panicked investors having been bluffed by their banks’ explanations and their media.
The main reason for the Fed to intervene in the gold market is probably to buy back the missing physical gold in its vaults, whether it’s gold in custody or its own gold. To achieve this, massive hits on the paper gold market are necessary in order to de-stabilize the ETFs’ physical gold owners and eventually lead to some capitulations. You shake the tree to get the fruit to fall. 800 tonnes of gold have fallen from the ETFs in 2013, but the harvest has been highjacked by the Chinese dragon via Switzerland and then Hong Kong, as statistics show, and this might have caused a little bit of anxiety for the American bankers.
Because, lest more and more stern measures be taken, the remaining gold in the ETFs and gold stored outside the banking system will be harder and harder to get a hold of. The price of gold, now back to the cost of production, announces a zero-risk premium on the financial markets, and this does not fit well with the real world economic and financial situation in 2014... Why, then, be selling fire insurance in these conditions?
The other explanation for this intermediate gold bear market, which conveniently avoids the unsettling conspiracy thesis, is linked to market psychology, thus to an irrationality that can periodically dominate the investors’ behavior.
We don’t have to remind ourselves that, yes, it is the stock market’s irrationality that creates buying or selling opportunities. The actual trend is pushing fund managers to chase yield, because of interest rates being fixed too low, and they chase what’s going up, even if what’s going up has no fundamental reasons to go up. And this creates in turn a movement spreading toward the top.
The more the Fed intervenes in the markets, the more it induces bubbles in all sorts of assets : stocks, bonds, real estate and commodities. The road this new Fed money takes is often hard to predict. When it goes toward stocks and real estate, as is the case since 2009, the wealth effect acts like a dynamo for the economy (without actually curing it), especially the financial markets, which are getting quite frothy due to the conjugated effects of greed and euphoria. And this create psychological loops that self-feed... until the bubble implodes. And we have tools to measure such a thing.
Traders play more and more on margin with leverage, price to earning ratios of stocks are becoming too high, profit margins are dwindling, the majority of participants are turning bullish, analyst sentiment is widely bullish, CEOs (the smart money) are abandoning ship and selling their own shares, the VIX (volatility index, or « fear » index) is at its lowest, etc, etc.
All those signals of entering in a bullish phase (ten indicators) have been compiled into a sole indicator, called the Greedometer, and it shows that all preceding highs on the stock market have been correctly predicted. The Fed’s interventions with its extraordinary measures since 2009 have kept the market from correcting many times, but the more the Fed pushes away the next recession, the harder the fall will be. The Greedometer has reached an historical peak and announces an equally historical crash in 2014-2015.
In this context of extreme bullish sentiment for the stock market, gold has initiated an intermediate bear market. It was also the same extreme bullish sentiment in 1999 for the stock market that caused an outflow from gold and gold miners. But all of this is about to change.
>> READ PART 4: WHAT MAKES THE GOLD PRICE GO UP?