Doom and gloom for gold overdone? – Are there positives ahead?

Seldom has the media been more bearish on gold’s prospects, and this will undoubtedly present itself in a further retreat from gold derivatives and gold stocks.

China seems to be being fingered for the latest gold price crash, but should it be?  A truly Machiavellian argument might be that the crash was perpetrated by those elements seen as anti-gold seeking to gain maximum advantage at a time when gold was already under pressure. And by undertaking some of the activity on the Shanghai markets seeking either to try and apportion the blame to Chinese hedge funds, but also to dampen the appetites of the gold purchasing Chinese people and institutions who may be seen as standing in the way of a major manipulated gold price downturn.

What is the evidence here?  The gold price crash was actually initiated in New York with an enormous futures sale – which then continued in Shanghai with a reported double whammy of a large 5 tonnes of physical gold being sold into the Shanghai Gold Exchange and another massive futures trade on the Shanghai Futures Exchange.  As the U.K.’s Ambrose Evans Pritchard puts it, writing in the Daily Telegraph – “Spot prices slumped by more than 4 percent to $1,086 an ounce in overnight trading after anonymous funds sold 57 tonnes of gold in Shanghai and New York, choosing the moment of minimum market liquidity in what appears to have been a synchronized strike intended to smash confidence.”

Indeed the initial COMEX futures sales, conducted at around 11.29 pm on Sunday night when activity on the exchanges would be at around their lowest, was so great that it forced two 20 second automatic trading halts because of the volumes – virtually unprecedented.  The chart below from Reuters shows the activity as noted by Bron Suchecki of the Perth Mint in his analysis of what took place.  The red circled initial drop was over a period of precisely 4 seconds!    If anyone tells you the gold price can’t be manipulated  here is an almost perfect counter argument.  The two green stars are when the automatic trading halts took place.

gcq5ann

The recent Chinese announcement of a far lower than expected increase in its gold reserves after a six year denial of any increase (although few believe the Chinese figure), coupled with a U.S. Fed interest raising start date now expected to be in September had already weakened the gold price and with what seems to have been a concerted anti-gold media campaign in most Western mainstream media, seldom will gold investors been on the end of a more gloomy array of prognostications.

Yet, when sentiment is as low as it is at present this often represents the turning point.  Readers of my articles on Mineweb may recall one of May last year entitled Gold to fall to $1,100 then skyrocket – silver, platinum in behind.  In it we discusses a prediction by Elliott Wave analyst, Peter Goodburn on a scenario as suggested in the title of the article – and indeed gold has now, as he then suggested, fallen to the $1100 mark, although perhaps a year behind the timing his initial premise may have suggested – but these things are always difficult to time accurately.  Now we shall see if gold does indeed recover from this level, and if it does, on the Goodburn projections the reversal in fortunes could be both rapid and very large indeed.  We shall see.  Personally I’m not a great believer in such chart analysis but have to recognise that the chartists are often, but not always, right in their predictions.

Goodburn’s company, WaveTrack International has thus put out a note today reminding clients of the prediction in a note entitled Gold Bullion – Time to be a Contrarian .  We will have to wait and see if this is indeed a good predictor of the gold price, but if it is we shouldn’t have long to wait.

Another possibly bullish point for gold is the IMF’s pending announcement – probably in October – of any revision in the make up of its Special Drawing Rights (SDR), which is broadly regarded as an indicator of global reserve currencies.  If, as many expect, the Chinese yuan is to be included, it would have to be at least close to pari passu with the US dollar which could, over time, lead to a major reduction in the dollar’s current role as the world’s principal reserve currency and be a major game-changer in the dollar’s global influence.  And with China, and the countries seen as already in its zone of influence (like India, Russia, Brazil and South Africa) seen as pro-gold nations this could well herald a significant change in sentiment for the yellow metal.

So could gold have reached its low point with the only way now upwards?  Its not beyond the bounds of possibility.  The recent move to drive the price down noted above has been so blatant that maybe some kind of counter reaction will be set in place.  Perhaps by China which has already demonstrated its capability of halting a stock market collapse in its tracks in the interests of stabilising its economy.  With so many of its citizens holding gold could it be prepared to do the same here, particularly if it feels the blame for the latest price collapse has unfairly been attributed to its financial elements?

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Update and repost: Gold price manipulation

There is a continuing argument over whether the gold price is manipulated and we feel that it is – along with virtually every other market out there – by institutions with sufficient funds to exert a degree of control.  That seems to be an integral part of the modern-day investment sector, whether one considers this ethical or not.  It is perhaps a key part of the capitalist system where wealth creation and enhancement is the ultimate goal of the financial  elite.

Is gold a special case?  Or is silver?  Investors in these precious metals certainly believe so and we feel there is sufficient evidence out there to say definitely yes.  And far greater forces than that of pure financial speculation is almost certainly involved, at least from time to time, when for the powers that be things start to be getting out of hand as they see it.

Why should gold in particular be a special case?

In many peoples’ eyes gold has been the ultimate form of money and indicator of wealth for centuries and since the world entered the 100% fiat currency era after President Nixon closed the gold window in 1971, before which the world’s principal global reserve currency was still backed by gold, many still see gold as the ultimate bellwether as an indicator of the true strength of these currencies and of the dollar in particular.  Control the bellwether and you control the herd!

The Gold Anti Trust Action Committee (GATA) has preached gold price suppression, implemented by the major central banks (the U.S. Fed in particular) with government support allied with the monetary power of the bullion banks to do so.  GATA has been very successful in procuring various government documents, memos and emails which would support their case. This documentation recognises that at various points in time gold has most certainly been on the agenda of the political and financial elite and needs to be controlled due to recognition that the gold price can pose a threat to their economic management and the overall picture they are trying of a stable currency and economy to present to the people.  Couple this with ongoing media propaganda downplaying gold’s power as an investment and such intervention can probably be kept to a minimum with investors and markets doing much of their dirty work for them most of the time.

But not all of the time!  Every now and then the gold price threatens to get out of control and more drastic measures are needed to knock it back.  Hence the flash crashes when huge futures transactions, often when major markets are mostly closed, are implemented with the seemingly intended purpose to knock prices sufficiently to trigger stop-loss computer trading and thus drive the price down even further.  These are a relatively recent phenomenon and are too frequent to be coincidental.  Indeed they are blatant.

This was perhaps exemplified – one might say trialled – in the much smaller silver market back in April 2011 when the silver price was soaring up close to $50 an ounce.  While silver may no longer be truly a monetary metal it still has monetary correlations in the eyes of many and while the silver price tends to move broadly in concert with gold, but with greater extremes, there would have been the fear that in this case the tail could be wagging the dog and if the silver price was allowed to continue its upwards path it could drag gold along with it.

But while the silver price was very successfully knocked back, gold managed to continue on its own upwards path for another 5 months and in August/September 2011 gold fever was in full swing and the yellow metal too looked to be taking off out of control.  Cue another huge flash crash, this time in gold.  The amount of capital at risk in the futures markets to implement this might be seen as exceptional with the theory that this was put in place by the bullion banks with central banks and government support.  True only circumstantial evidence here, but the numbers suggested something hugely more than any normal trading activity.

Once this was seen to be successful, so the theory goes, almost every time some piece of government data, or world news, seen as potentially strongly gold positive has been released there has been an almost instantaneous similar, but smaller, flash crash implemented through big futures transactions – always seemingly designed to take the price down to stop-loss selling levels.  Coupled with a Fed easing programme designed to boost the general stock markets these have turned investor sentiment away from gold very successfully and the price has mostly been drifting downwards.

So what next for gold?  The gold investment fraternity will be hoping that the huge gold flows from West to East and the likely prospect of China eventually wresting control of gold benchmark price setting from London will reduce the power of COMEX futures market dominated price manipulation.  But China itself may then well set its own price manipulation process in place – it certainly has the financial power to do so -although the agenda and price direction may be different!  We shall see.

For more on this subject and more on what’s been happening in the silver market, readers should take a look at my other recent article on this subject on Mineweb – See: Gold price manipulation: Who really calls the tune? and an earlier article What’s with JPMorgan and its massive silver hoard?

Gold’s flash crashes – what should be done?

There’s a Huge Disparity Between How Regulators Deal with Gold and Stock Market Manipulation

By Frank Holmes – CEO and Chief Investment Advisor, U.S. Global Investors

Gold futures were going bonkers in the fall of 2013 and early 2014.

On a weekly and sometimes daily basis, unbelievably massive gold contracts were coming on the market at non-peak trading hours, only to be withdrawn almost instantaneously. In one particularly alarming instance in January 2014, the yellow metal plummeted $30, from $1,245 an ounce to below $1,215, in as little as 100 milliseconds.

The GOld Futures "Flash Crash" of January 6, 2014
click to enlarge

Whatever the cause of this behavior—“fat finger” errors, as some people suggested, or “quote stuffing,” as others suspected—markets were effectively shaken.

From the very beginning, we reported on these anomalies in a series of commentaries that read now like notes from a foxhole. In the September 13, 2013 edition of our Investor Alert, the USGI investments team wrote:

The bullion plunge this week sent the yellow metal breaking below the 100- and 50-day moving averages. Strange dealing patterns are adversely affecting the gold price. These dealings revolve around the “flashing” of massive gold contracts for sale to traders, at a time of day that there is normally little or no activity in the markets, and no news story being released.

Then, on October 25:

You can see massive trading volumes every day of over 5,000 contracts, all around the same time. On the first of October, as well as on October 10, there were massive trades of over 20,000 contracts. This amount represents well over two million ounces, or around $2.6 billion. It’s safe to say nobody has that amount of physical gold, apart from the big central banks, so these trades are being done by entities trading gold they do not have in a manner designed primarily to trigger stop loss orders.

Unusual Gold Trades Triggering Sharp Swings in Gold Price
click to enlarge

And again, on December 20, 2013:

In recent weeks, there have been concerns among market participants and regulators that the process for establishing the price of gold may lend itself to insider trading and other forms of unfair dealing. The spot price of gold tends to drop sharply around the London evening fixing, or 10:00 a.m. Eastern. A similar, if less pronounced, drop in price occurs around the London morning fixing. For both commodities, there were, on average, no comparable price changes at any other time of the day. These patterns appear to be consistent with manipulation in both markets.

Although these “strange dealing patterns” eventually tapered off, it remained a mystery who or what was behind them.

Until now.

Last week, the CME Group officially accused Mirus Futures, a now-defunct brokerage firm, of failing to “adequately monitor the operation of its trading platform,” which resulted in “unusually large and atypical trading activity by several of the Firm’s customers.” This is what allegedly led to the disruption in price discovery in the gold futures market.

The Partyallegedly behind the gold "flash crashes" in 2013 and 2014 has been identified.

What’s unclear is how culpable Mirus Futures really was in all of this. At the very least, it acted carelessly. Did its trading platform have a glitch, and if so, when did Mirus become aware of it? Was it deliberately trying to manipulate the gold markets? There’s no way we can know the answers to these questions. That Mirus has since been acquired by another brokerage firm would make any investigation into its intentions—if there were any to begin with—even more challenging for authorities.

What I find especially notable, though, is that the firm settled with the CME by paying a fine of only $200,000.

This is already a pretty paltry amount, considering how far-reaching its actions (or inactions) were. But when you compare the $200,000 penalty to what Navinder Sing Sarao faces, a huge disparity in the enforcement of such white collar crimes emerges.

Flashing the Stock Market

You might not be familiar with the name Navinder “Nav” Sarao, but it’s likely you’ve heard of the event he’s accused of orchestrating, thanks largely to Michael Lewis’s bestselling book Flash Boys. On May 6, 2010, Sarao, a 36-year-old British day trader, allegedly spoofed American markets using a familiar technique: mammoth-size orders were placed, only to be withdrawn right before execution. Price discovery broke down. In the brief timespan of five minutes, the Dow Jones Industrial Average was taken on a wild 1,000-point ride. Shares of Procter & Gamble fell to as little as a penny. Altogether, nearly $1 trillion in value vanished from U.S. stocks.

Down Jones Industrial Average on May 6, 2010
click to enlarge

Two months after being arrested by Scotland Yard, Sarao now sits in a British prison on bail set at $7.5 million, his assets completely frozen. He awaits extradition to the U.S., where he will face multiple charges, including several counts of market manipulation, commodity fraud, wire fraud and more. According to the Department of Justice, “Sarao’s alleged manipulation earned him significant profits and contributed to a major drop in the U.S. stock market.”

The maximum sentence for all charges is 380 years in jail. Next to that, a $200,000 fine seems more reward than punishment.

You could argue that the upheaval that Sarao contributed to, if not singlehandedly caused, is more significant than the series of gold flashes that occurred in 2013 and 2014. Or that Sarao demonstrated nefarious intentions more unambiguously than Mirus Futures did. Still, the discrepancy is colossal and hard to ignore.

“Apparently regulators care much more about manipulation of the stock market than gold,” commented Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX).

This could be a problem. As long as rogue traders are convinced that their actions will go unchecked, the gold market could continue to be a target and the metal’s fair value remain under pressure. As I wrote last year in my whitepaper Managing Expectations: “We welcome the regulators to explore ways to manage these issues better and create both a fairer playing field and more transparent trading arena.”

But until gold is allowed to find its true, fundamental value, now might be a good time to accumulate. As always, I recommend that investors allocate 10 percent of their portfolios to gold—5 percent in bullion, 5 percent in gold stocks, then rebalance every year.

 

 

Dearth of gold articles!

Apologies for the apparent dearth of gold and precious metals articles from me published here this week.  Its not that I haven’t been writing – I have – but most of my work in the past week has been going direct to Mineweb – my main source of income –  so you can still read my thoughts and comments on what’s happening in gold and silver – and sometimes in other metals too – (notably platinum in the past week) so you can always read them there.

Here follow links to some of my recent Mineweb articles.  I’d hate to deprive you of my thoughts however obscure they may be!  Apologies if you have already read all or any of them

China gold demand up 17% ytd

Russia cools gold reserve additions in January

Platinum price puzzles

Can platinum regain its premium over gold in Q2-Q3?

Have the big banks been manipulating gold and silver prices?
 African mineral development risk: The best and worst nations

And my latest – published today:

HK January gold exports to China confirm strong demand