Morning Gold Fix: July 7, 2010
Commentary courtesy of www.fmxconnect.com
On Tuesday, gold dropped to its lowest level in 6 weeks as investors explore riskier assets. China’s statement that it has no plans to start allocating more gold to its reserves (percentage wise), isn’t giving bulls much to work with this morning. Gold opened at $1212.2 per 100 troy ounces, and dropped to 1195.1 by closing time.
Gold- What is Going On?
Yesterdays’ activity was just ugly if you are a bull, but not unexpected. All seems to be well in the land of sovereign debt and trust. The dollar was weaker and so was Gold. This is an unwind of the European default trade. We would expect this “normalization” of things to continue as the world’s attention is grabbed by other more important headlines like LiLo’s jail sentence and other legit issues like the GOM disaster.
It has been said a million times that the can is being kicked down the road, and that the underlying issue has not changed. That the sovereign risk of default is still there. Yet things have gotten pretty bearish in Gold since the G-20, and this is interesting considering that the word “Gold” was mentioned a grand total of 1x in their public notes.
I personally hate to admit that the bullion conspiracy theorists have anything of value to add, but am coming around in my own way. How else can you explain the IMF telling Sprott he is “ineligible” to take delivery of the gold they are selling, while they execute monster swap trades with central banks. C’mon… I give you money, you give me gold. WTF, it is a cash and carry trade. Write check, get gold. These guys are holding it back to rescue some schmuck banks that dug a hole for themselves. I’m sure there are legit reasons why Sprott cannot get access to the IMF’s Gold Discount Window (GDW) but am starting to think that TBTF includes banks short gold against swap positions as well.
Thebulliondesk.com said, (emphasis ours):
“In its 2010 annual report, the BIS said that "gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold," stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009.
While the data is relevant to the end of BIS’ 2010 financial year in March, data posted to the International Monetary Fund and carried by Bloomberg show the swap still growing in April, analyst Andy Smith of Bache Commodities noted.
To now, this implies a swap of about 380 tonnes from the end of 2009, he said in a report.”
This is very similar to the Gold Carry trade the NY Fed did for years in the 90s. Lend Gold to Investment Banks at low lease rates. Banks sell it in the market and take proceeds to buy higher yielding currencies. Hence the (GDW)
1. Borrow gold at .5% annually
2. Short gold in market
3. Take dollars and buy Aussie bonds @ 9%
Market goes up? Use the loaned Gold as collateral and re-up the loan. It’s a great trade.
All this said, to the tin foil hat crowd I’ll say this. What makes you think that the Gold market will be liberated from these shenanigans ever, considering much bigger markets with more transparency and relevancy are having their books cooked constantly? To wit, equities and currencies. Smarter people than us, with more influence in global markets are hitting their heads against walls trying to unmask the stupidity of our financial system with no luck. Who the hell is going to take up the banner of the Gold bugs that has any weight or time to do it? Just corner the market. It would only take 1 trillion dollars, far less than trades in a single day in currencies.
I’ll try to get to the Comex/OTC Arb tomorrow
August gold was down 8.5 to $1186.6 per 100 troy ounces as of 7:11 AM EST, this morning. The September U.S. dollar index was up .204 to 84.510. October platinum was down 9.9 to $1508.8 per 50 troy ounces. Silver was down 19.7 cents to 17.660.