Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

Has the Great Gold Crash Divorced Bullion from Futures Prices?

admin by admin
May 14, 2013
in Uncategorized
0
0
SHARES
52
VIEWS
Share on FacebookShare on Twitter

Money Morning Article of the Week

by Peter Krauth, Money Morning

In mid-April, a black swan crash-landed on the gold market.

Over just two trading days, gold futures prices shed 13%, falling from $1,575 to $1,375.

That $200 cliff dive was the largest two-day drop in 33 years.

Gold prices already had been in steady consolidation mode for 18 months. But the magnitude and swiftness of this dramatic move were rare…to the point of suspicion.

How did markets react? Unlike almost anyone expected.

What caused such a landslide, and who may be behind it? More importantly, what are the implications for the precious metals markets moving forward?

The conclusions will surprise you – and help you invest more wisely.

Past As Prologue

To understand what happened, we need to first dissect the circumstances surrounding the event.

The gold futures selloff were so extreme, it’s difficult not to conclude that whoever may have initiated this effort achieved exactly what was intended: a gold panic.

However, the law of unintended consequences tells us that some actions have unanticipated effects. And given the reaction in the physical gold markets, it appears the perpetrators of a gold panic (if they indeed exist) will find it difficult to achieve their goals in the future.

The Timeline

A number of bearish news stories were released in the days and weeks leading into the selloff.

First came word that infamous hedge fund manager George Soros had dramatically cut his fund’s gold ETF holdings by 55% in 4Q 2012. But having already dumped (as a group) a total of 140 tons just in 1Q this year, gold ETFs were already suffering a bloodletting.

Three days before the initial selloff, the Fed’s Open Market Committee minutes were leaked a day early. They revealed that some members were in favor of slowing the Fed’s monthly purchases of $85 billion worth of mortgage-backed securities and Treasuries.

The next day, with gold trading at $1,575, Goldman Sachs lowered its 2013 and 2014 gold price estimates, and recommended shorting gold with a $1,450 target, suggesting gold prices had peaked.

Was Goldman prescient, lucky, or did they know what was coming?

The Plot Thickens

The very next day, news broke that Cyprus may be pressured by Europe to sell 10 of its 14 tons of gold reserves, worth some $400 million euros, in order to meet its bank bailout obligations. This was initially denied by Cypriot officials, then later confirmed.

But worry quickly spread that other debt-strapped euro members could be forced down the same path, potentially flooding the market with the Midas metal.

Further pressuring negative sentiment, the Commitment of Traders Report published by the COMEX showed that large speculators had become less bullish. As a group, they typically move with the market, and they’d recently become their least bullish in four years. What’s more, their sheer size is enough to sway the gold futures markets in either direction.

It’s anyone’s guess whether any or all of these events contributed to the gold price crash. But it’s impossible to imagine that what happened next did not. In fact, this single overwhelming factor was likely enough to smash the paper gold markets all on its own.

April 12 saw what I’d generously categorize as very conspicuous activity: The futures markets were simply deluged by two massive trades, perhaps the largest ever.

First an order to sell futures contracts for 100 tons was placed, almost as if to “test the waters.” Then, about an hour later, a second order of 300 tons hit the offer.

Now here’s a little perspective; 1 ton is the equivalent of 32,000 ounces, so 400 tons is 12.8 million ounces. That’s $19.8 billion worth of gold at $1,550 per ounce. The equivalent of 20% of total world annual gold production was put up for sale within a few short hours!

Response in the gold futures markets wasn’t surprising.

Paper Gold Reaction

Hit by an atomic bomb, gold futures sold off … dramatically.

The initial selling pressure was enough to push gold below its technically important $1,540, a make-or-break level it hadn’t crossed in all of 2012.

An enormous move like this has a tendency to trigger stop losses. That in turn can become a vicious downward spiral with even lower stops being triggered. Margin calls are issued, and many positions are forced to liquidate. And that can lead to a panic, where traders essentially try to stampede out.

Exacerbating the situation, margin requirements are increased as futures contracts lose value. On April 15, after gold’s largest two-day drop in 33 years, the CME Group pushed up margin requirements on gold futures by 19% and on silver futures by 16%.

Traders were then forced to post more cash, or sell at least a portion of their holdings just to meet the new higher margin requirements. Naturally, this helped to push prices even lower still.

But that’s just half the story.

Physical Gold Reaction

Response in the physical gold markets was astonishing.

In the immediate aftermath of the selloff for both gold and silver, demand for physical bullion simply exploded. It appears there was substantial pent up demand waiting for an important price drop in order to buy. It also appears that the swift and unpredictable downward price action in the futures market spooked gold buyers into wanting nothing less than physical gold in their hands.

Numerous gold buyers saw the price drop as an opportunity to get into the gold market. What they hadn’t anticipated was how many others were thinking the exact same thing at precisely the same time.

Premiums on physical gold and silver went ballistic. There are countless reports of physical bar and coin shortages at bullion dealers in both the Western and Eastern hemispheres.

China saw 15-month highs for gold premiums. The Financial Times reported the president of the Hong Kong Gold & Silver Exchange Society, Haywood Cheung, as saying that –

“in terms of volume, I haven’t seen this gold rush for over 20 years. Older members who have been in the business for 50 years haven’t seen such a thing.“

Anxious gold buyers formed long lines in Beijing outside gold retailers. The Gold Exchange in Shanghai saw its contracts exceed 150 metric tons in the week of April 15 alone.

According to a Mineweb report, some Dubai gold merchants boosted their premiums by 750% above normal levels. And trading on the Dubai Gold and Commodities Exchange hit a volume record on April 16.

On April 17, the U.S. Mint sold a record 63,500 ounces (or roughly 2 tons) of gold coins. By April 19, year-to-date sales had already reached 62% of total 2012 sales.

In the physical silver markets premiums shot up from pre-selloff around 8% to post-selloff up to 37%. That totally negated the effect of the price crash, with silver bullion selling at the same price as before the selloff, near $31/ounce.

In the first three months of 2013, the U.S. Mint sold more than 15 million American Silver Eagle bullion coins. That’s the first time ever the Mint has sold this many coins so early in the year, setting a record in the 27-year history of the series.

Coin dealers across the U.S. have been swamped with demand, regularly selling out of their inventories, desperate to get new allocations.

Some buyers waited in long lineups with the intent of buying silver coins. When they reached the wicket, only large bars at high premiums were left, which many bought nonetheless just so not to leave empty-handed.

This reaction indicates that the physical gold and silver markets appear to be at a crossroads. We may have seen the defining moment where physical markets begin to divorce themselves from the paper futures markets.

A quick internet search for gold and silver coins on Ebay or at bullion dealers easily confirms that futures prices may no longer be able to dictate physical precious metals prices.

Plunge Precipitation Team?

The gold selloff conspiracy question begs the question: “Who would do this and why?”

Experienced traders with a large order to execute, such as the mammoth 400 tons, know to spread these out into numerous orders over time. That allows the market to absorb smaller individual sales with much less dramatic downward price pressure, allowing for higher proceeds from each sale.

No one selling this much gold in such a large transaction is stupid enough not to foresee the immediate consequences. They have to have known that the gold price would get crushed. The seller was either desperate to unload it, or deliberately wanted a much lower price.

And there is a point at which evidence becomes so compelling that it’s nearly impossible not to suspect some of the largest stakeholders in this market.

There have been a number of suggestions by well-informed market observers that a few large speculators have been manipulating the gold and silver futures markets for years. This recent sale of 400 tons in a single day looks and smells like a concerted effort to push the gold price way down in short order.

Who could pull this off? The most likely perpetrators would be either Western central banks or large bullion banks (large speculators), or perhaps the two groups in concert.

Quo Vadis?

The price of gold is a gauge of inflation, which is the result of printing fiat money. Central banks benefit from a lower gold price as it gives the impression that they are not dropping cash from helicopters.

On the other hand, a high and rising gold price signals concern for inflation as ever-increasing quantities of fiat currency are pumped into the money supply. Gold acts as the proverbial canary in the coal mine.

Large bullion banks, for their part, can benefit from the sheer size of their net long or short positions. If bullion banks choose to build up large short positions, and then initiate a gold price crash (as we may have just witnessed), they benefit by cashing in on their short positions. Once the dust settles, these nimble speculators can also profit from the likely bounce that almost always follows the selloff by going long.

However, let’s not forget the law of unintended consequences. It now appears the perpetrators of the gold panic may find it increasingly difficult to achieve any future manipulations.

Law of Unintended Consequences

Back in March ABN Amro, one of Holland’s largest banks, told its clients that it would no longer be delivering physical gold. All accounts with gold holdings would be settled in cash rather than bullion, whereas clients previously could have taken delivery.

This naturally raises suspicion that the custodian simply doesn’t have sufficient gold to deliver on all accounts.

It’s been suggested that as much as 100 times the amount of physically delivered gold is traded in the form of paper gold on futures exchanges.

The trigger for ending potential gold price manipulation could come from a default in the futures markets.

All it would take is for too many holders of gold futures contracts to demand physical delivery simultaneously. This would overwhelm the exchange, forcing it to settle in cash for lack of sufficient physical bullion. And that would instantly call into question the integrity of the exchange, much like Bear Stearns, Lehman, and AIG did to the financial system.

The news from ABN Amro, followed by the mid-April gold price crash, look like the first rains warning of an approaching hurricane.

A major default in the futures markets could remove the last shackles holding back a true free market gold price naturally set by supply and demand. Based on recent price action in the physical gold market, it appears we’ve taken a big step toward that outcome.

We may soon be on the cusp of a brand new gold paradigm, one where prices are set by the physical markets rather than the futures markets. That will make for interesting times.

Would-be manipulators beware: your job just got tougher.

Related Articles and News:

  • Money Morning:
    By The 2016 Election Gold Could Be $3700 an Ounce
  • Money Morning:
    2013 Gold Price Forecast: Expect Gold to Deliver Another Record-Setting Year
  • Money Morning:
    Forget the Punch Bowl, With QE3 Ben’s Party is Open Bar
  • Money Morning:
    Seven Ways to Tell if Your Gold is Counterfeit

Previous Post

Skills, Education and Employment

Next Post

Philly Fed’s Plosser: Using the Corridor When Exiting QE

Related Posts

Lab-Grown Meat Draws Closer To American Dinner Plates
Business

Lab-Grown Meat Draws Closer To American Dinner Plates

by John Wanguba
January 26, 2023
New Suppliers Scramble To Plug Into Electric Vehicle Market
Business

New Suppliers Scramble To Plug Into Electric Vehicle Market

by John Wanguba
January 26, 2023
Coinbase Fined $3.6 Million In The Netherlands
Business

Coinbase Fined $3.6 Million In The Netherlands

by John Wanguba
January 26, 2023
Consumer Reports Encourage Dark Chocolate Producers To Minimize Lead, Cadmium Levels
Business

Consumer Reports Encourage Dark Chocolate Producers To Minimize Lead, Cadmium Levels

by John Wanguba
January 26, 2023
Bloomberg To Pay $5M Fine To Settle SEC Charges Linked To Fixed-Income Valuations
Business

Bloomberg To Pay $5M Fine To Settle SEC Charges Linked To Fixed-Income Valuations

by John Wanguba
January 26, 2023
Next Post

Philly Fed's Plosser: Using the Corridor When Exiting QE

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins banking banks Binance Bitcoin Bitcoin adoption Bitcoin market Bitcoin mining blockchain BTC business China crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum Europe finance FTX inflation investment market analysis markets Metaverse mining NFT nonfungible tokens oil market price analysis recession regulation Russia technology Tesla the UK the US Twitter

Archives

  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • Lab-Grown Meat Draws Closer To American Dinner Plates
  • New Suppliers Scramble To Plug Into Electric Vehicle Market
  • Coinbase Fined $3.6 Million In The Netherlands

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish