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Why Is Gold Crashing?

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Gold Crashes Most in 30 Years … What Does It Really Mean?

Gold has fallen off a cliff.   It has fallen faster than at any time in the last 30 years.

Zero Hedge notes:

Adding insult to injury, the Shanghai Gold Exchange overnight announced that following the tumbling precious metal prices and limit down drop in early trading, it may raise trading margins for its gold and silver forward contracts.

(Margin calls tend to trigger further selling.)

Some Say It Is a Good Time to Buy

While most financial advisers are screaming “sell!”, there are some well-known contrarians.

For example, Bill Gross still recommends buying gold.

Marc Faber says:

“I love the fact that gold is finally breaking down because that will offer an excellent buying opportunity” …. “The bull market in gold is not completed.”

John Hathaway of Tocqueville Funds (with $10 billion under management) says that the selloff in gold is “a contrarian’s dream scenario”:

The evidence shows strong macro fundamentals for gold, investor sentiment at a negative extreme and compelling valuations in the mining shares. It seems like a contrarian’s dream scenario to us.

And Zero Hedge notes that – from the perspective of technical analysis – gold is the most oversold it has been in 14 years.

The Bearish Explanation

But why has gold crashed?

Bloomberg blames:

  • “Optimism that a U.S. recovery will curb the need for stimulus”; and
  • “The prospect that beleaguered members of the euro zone might be forced to sell gold to raise part of the funding, and there are much bigger holders in that category than Cyprus.”

Citigroup opines:

Gold decline may have been related to some break in technical levels and the general improvement in global risk appetite.

Business Insider argues:

[Gold's price collapse] vindicates the economic ideas of the economic elites.

 

***

 

To respond to the economic crisis, economists and mainstream policy makers have favored highly unusual policy measures (massive Fed balance sheet expansion, massive stimulus, etc.). These ideas are usually based on years of traditional economic research (Keynesianism, monetarism, etc.).

 

All of these ideas have been slammed by heterodox types like Austrian economists, who have warned of hyperinflation, and gold going to $10,000.

 

So the collapse in gold is not about gold, but about vindication for a large corpus of belief and economic research, which has largely panned out. It’s great that our economic elites know what they’re talking about, and have the tools at their disposal to address crises without creating some new catastrophe.

 

Things aren’t great in the economy, but the collapse/hyperinflation fears haven’t panned out, and the decline in gold is a manifestation of that.

Barry Ritholtz writes:

History shows Gold trades differently than equities. Why? It comes back to those fundamentals.

 

It has are none.

 

This is not to say gold is not affected by Macro issues. But that is very different than saying Gld has a fundamental value, an intrinsic worth. It does not. That led to this heretical advice: Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no earnings, no coupon. no yield. What people call fundamentals are nothing more than broad macro analysis (and how have your macro funds done lately?). Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias.

 

I do not want to engage in Goldenfreude — the delight in gold bugs’ collective pain — but I am compelled to point out how basic flaws in their belief system has led them to this place where they are today.

 

Gold does trade technically, and is especially driven by the collective belief system of the crowd. When that falter, well, you know what happens . . .

The Gold Bugs View

Gold bugs, on the other hand, see things quite differently.

Andrew Maguire says that the crash is solely in the paper gold market … and that there is actually a shortage of physical gold. Many other sources make the same claim.

Egon von Greyerz – founder and managing partner at Matterhorn Asset Management – argues:

They shouldn’t be concerned about the temporary pressure on gold.  This decline has nothing to do with the physical market because enormous demand for gold continues.

 

The paper market in gold is not a real market, and at some point in the near future paper gold holders will wake up and realize they are holding are worthless pieces of paper.  This is when the world will witness one of the greatest short squeezes in history as investors panic in to physical and the price of gold explodes to the upside.”

London bullion dealer Sharps Pixley thinks that the crash was largely initiated by a single entity:

The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level… the line in the sand.

 

Two hours later the initial selling, rumoured to have been routed through Merrill Lynch’s floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted ‘short sale’, which by driving prices sharply lower in a display of ‘shock & awe’ – would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called ‘stopped-out’ in market parlance – probably hidden the unimpeachable (?) $1540 level.

 

The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tonne of gold futures selling in total equates to 15% of annual gold mine production – too much for the market to readily absorb, especially with sentiment weak following gold’s non performance in the wake of Japanese QE, a nuclear threat from North Korea and weakening US economic data.

 

***

 

By forcing the market lower the Fund sought to prompt a cascade or avalanche of additional selling, proving the lie \; predictably some newswires were premature in announcing the death of the gold bull run doing, in effect, the dirty work of the shorters in driving the market lower still.

Gold Core’s Mark O’Byrne agrees.

James Rickards thinks the Fed is manipulating the gold market (and every other market).

Former assistant Treasury Secretary Paul Craig Roberts says:

Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollar’s exchange rate. The Fed used naked shorts in the paper gold market to offset the price effect of a rising demand for bullion possession. Short sales that drive down the price trigger stop-loss orders that automatically lead to individual sales of bullion holdings once their loss limits are reached.

 

***

 

According to Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can be to drive down the market price.

 

***

 

Bullion dealer Bill Haynes told kingworldnews.com that last Friday bullion purchasers among the public outpaced sellers by 50 to 1, and that the premiums over the spot price on gold and silver coins are the highest in decades. I myself checked with Gainesville Coins and was told that far more buyers than sellers had responded to the price drop.

 

***

 

In addition to short selling that is clearly intended to drive down the gold price, orchestration is also indicated by the advance announcements this month first from brokerage houses and then from Goldman Sachs that hedge funds and institutional investors would be selling their gold positions.

 

***

 

I see the orchestrated effort to suppress the price of gold and silver as a sign that the authorities are frightened that trouble is brewing that they cannot control unless there is strong confidence in the dollar.

Roberts also says:

This is an orchestration (the smash in gold).  It’s been going on now from the beginning of April.  Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance.   Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold.  So what they are trying to do is scare the individual investor out of bullion.  Clearly there is something desperate going on….

Indeed, this may tie into the Federal Reserve leak of insider information.  Specifically, Roberts writes:

The Federal Reserve began its April Fool’s assault on gold by sending the word to brokerage houses, which quickly went out to clients, that hedge funds and other large investors were going to unload their gold positions and that clients should get out of the precious metal market prior to these sales. As this inside information was the government’s own strategy, individuals cannot be prosecuted for acting on it. By this operation, the Federal Reserve, a totally corrupt entity, was able to combine individual flight with institutional flight. Bullion prices took a big hit, and bullishness departed from the gold and silver markets. The flow of dollars into bullion, which threatened to become a torrent, was stopped.

As Congressman Grayson pointed out in a recent letter, right after the Federal Reserve’s Open Market Committee leaked valuable inside information to big banks, Goldman told its clients:

We recommend initiating a short COMEX gold position ….

Background on gold manipulation.

 

 

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Mon, 04/15/2013 - 18:39 | 3453458 NoTTD
NoTTD's picture

Viva!

Mon, 04/15/2013 - 15:31 | 3451975 Mad Mohel
Mad Mohel's picture

As crazy as I am sure you are, that actually made sense :|

Mon, 04/15/2013 - 15:09 | 3451790 Cone of Silence
Cone of Silence's picture

Gold goes down in a recession.   We are in a gigantic recession.  People who do not own any gold are not setting up accounts to buy it today.  Only people who already have a few coins are out looking for some more gold to buy  today.  The big money is moving in the paper markets, and the little people are trying to snap up a bargain on a few coins.  The price is for a June delivery. 

Mon, 04/15/2013 - 15:10 | 3451758 Widowmaker
Widowmaker's picture

You lipshits are asking the wrong questions.

This isn't a question of "why" rather is a question of how.

The means is market-fellatio.  If central planning fraud-fuckoffs can get a rise from equities 5 years strong why would anyone sane question the ability to repress other classes of assets to make their racketeering easier.

The next question is "who?"

That of course is a .1% national secret in every Western "nation"

Mon, 04/15/2013 - 14:55 | 3451673 Smiddywesson
Smiddywesson's picture

"So the collapse in gold is not about gold, but about vindication for a large corpus of belief and economic research, which has largely panned out" - Business Insider

So the amount of debt that has spiraled out of control isn't a concern and the eggheads of economic orthodoxy are vindicated?

Vindicated?  Hmmm

OK, then raise interest rates, I dare ya.

Mon, 04/15/2013 - 16:07 | 3452237 Ban KKiller
Ban KKiller's picture

"raise interest rate"....EXACTLY IF...the ecomomy is so great. Raise rates if asset value has risen. Raising rates will NOT happen as then the derivative "market", such as it is, will collapse in one fell swoop of panic. Oh, the panic is here and it is not for the holders of physical. Buy the physical now...of course. This is not a play for sissies...but holders. 

Mon, 04/15/2013 - 15:13 | 3451813 Widowmaker
Widowmaker's picture

Fraud is more valuable than gold.  Interest rates prove it as that is the means to your wealth confiscation.

ZIRP to infinity, funded by your retirement and entitlement.

Mon, 04/15/2013 - 15:07 | 3451619 falak pema
falak pema's picture

Well, If one guy is laffing at the gold bugs its this guy : 

KRUGMAN: Gold Bugs Are Really Annoying, And The Actually Don't Have A Clue - Business Insider

But is this gold thingie leading on to something bigger??

Stock Market Sell-Off - Business Insider

 

And this to iconic ZH libertarian spear carrier : 

Ron Paul Is Personally Losing A Fortune Because Of Gold Tanking - Business Insider

Mon, 04/15/2013 - 14:46 | 3451581 Downtoolong
Downtoolong's picture

Wait a minute, has anyone seen Corzine lately?

Mon, 04/15/2013 - 21:09 | 3454213 MeelionDollerBogus
MeelionDollerBogus's picture

No worries, he will now head up an insurance company to underwrite the COMEX vaults!

/sarc

… or is it?

Mon, 04/15/2013 - 14:46 | 3451573 falak pema
falak pema's picture

In what way does a "roundup" of opinions help to see the wood from the trees?

Mon, 04/15/2013 - 14:45 | 3451567 rustymason
rustymason's picture

Though I bought into gold very low and I am "in it for the long haul," this latest rollercoaster fall is still not very fun.

Mon, 04/15/2013 - 15:54 | 3452159 monoloco
monoloco's picture

It's actually pretty ingenious how the banksters have used paper (GLD) gold, that most likely never existed, to manipulate the price of the real thing. They have really fucked the world by making the only choices to either put your money in a bank with less than zero yield and the risk of confiscation or let the hucksters in the market casino swindle it out of you. Truly a heads I win tails you lose propisition. The sooner they are swinging from light poles the better.

Mon, 04/15/2013 - 20:08 | 3453878 lotsoffun
lotsoffun's picture

it took them a long time to figure it out, and of course, our co-operation.  the biggest move was the '401k' - invest it yourself scam.  we should have really stayed with pensions invested by professionals that needed to insure that your money was going to be there, and their reputations on the line for not having lost it.

Mon, 04/15/2013 - 14:39 | 3451540 QQQBall
QQQBall's picture

the public were buyers by a ratio of 50 to 1... any questions?

Mon, 04/15/2013 - 14:54 | 3451660 Lordflin
Lordflin's picture

It would be amusing, were folks not actually hurt in the process, to see these folks come out with their articles vindicating their self serving, money printing, economy, after a contrived collapse resulting from a massive paper push... Although I agree with the statement that gold is not an investment... it is not. It is money... nothing more or less. Converting paper to physical metal is the truest form of setting on the sidelines in a cash position... one that cannot be touched except through brute force...

As to a recovery... doubtful even the muppets much believe in that one anymore... well, maybe they do... but the frosting is most definitely off the cake...

Mon, 04/15/2013 - 14:45 | 3451583 hankwil74
hankwil74's picture

The public?  You mean the bottom 70% of the country that is up to their eyeballs in housing, credit card, and student loan debt?  Those people?

Mon, 04/15/2013 - 15:55 | 3452148 oddjob
oddjob's picture

No, the real buyers in Turkey and India where Gold just got alot cheaper, those people. The people with no credit cards or that noble consumer debt, go figure that.

Mon, 04/15/2013 - 14:30 | 3451486 MedTechEntrepreneur
MedTechEntrepreneur's picture

What does it mean?  It means TPTB are trying to drive liquidity into dollars rather than PM's.  They dont want JPY going into Gold.  Look for dollar index to soar moar!

Mon, 04/15/2013 - 14:29 | 3451459 Smiddywesson
Smiddywesson's picture

The question, "why is gold crashing?" must be rephrased to answer it properly.

Q:  Why is the gold market crashing?

A:  What makes us think it must always act like a market?  Do we have complete religious faith in markets?  Can't something be more than one thing, like an argument with one's spouse?  After seeing gold defy reality with the Swiss intervention, and people selling hugh amounts of volume overnight when doing so is suicide, after seeing attack after attack followed up with repeated margin increases, how can anyone imply this is only a market?

Gold is crashing because it is in the best interests of some of the participants that it crash, and those participants have the desire, the money, and know how to make it crash.

Mon, 04/15/2013 - 17:39 | 3453021 Diogenes
Diogenes's picture

Because someone sold $20 Billion worth of gold contracts on Friday for a start.

Mon, 04/15/2013 - 14:21 | 3451422 MathWins
MathWins's picture

“Optimism that a U.S. recovery will curb the need for stimulus”

Yeah............sure, that's it.  Bwahahaha

I'm beginning to sniff a bit of desperation in the air.

 

Mon, 04/15/2013 - 16:26 | 3451419 Arbysauce
Arbysauce's picture

Ritholtz says gold has no intrinsic value.  I've heard it said alot.  I absolutely disagree.

Money is one of the most useful technologies ever invented, on par with the wheel in my opinion. Gold performs the store of value function of money better than any other material.  *That* is its intrinsic value, the same way any other material has value because of its use for a particular technology.  Saying gold has no intrinsic value is the same as saying the rare earths have no intrinsic value.  The day money is no longer a useful technology is the day gold has no intrinsic value.

Mon, 04/15/2013 - 14:10 | 3451368 optionsman
optionsman's picture

the Fed is not going to slow down QE. they understand that no-one can win competitive currency devaluation if all are concerned about it. so the Fed is actually pushing other CBs to print more to sort of keep up with the Fed. IMHO the ultimate goal of this currency war is weakening of other industrialized and developing nations economies relative to that of the US. The US stands to win this stage of the economic war given USD reserve currency status. Gold however is also a threat in this equation. I wouldnt be surprized to find out some years later that the Fed is involved in the current gold price plunge.

just saying.....

Mon, 04/15/2013 - 20:11 | 3453898 lotsoffun
lotsoffun's picture

The US stands to win this stage of the economic war given USD reserve currency status.  and also the size and power of it's standing army.  if you don't want to play along, well.  go ask saddam and qaddafi (and many others) how that worked out for them)

Mon, 04/15/2013 - 14:22 | 3451432 AGuy
AGuy's picture

<--- Planning to Buy more PMs (Double down)

<--- Panic: Dumping my PM holdings

 

Vote: Betchya not a single vote for Dumping PMs. Perhaps a few are selling, but will buy back as soon as the route is finshed.

Mon, 04/15/2013 - 18:19 | 3453309 WhiteNight123129
WhiteNight123129's picture

I am not planning, I am buying now.

 

HERE IS WHY GOLD HAS TO GO LOWER: JAPAN

The Gold price has risen in Japan even before the attempt to debase the currency.

If Gold were to spike in Yen, it would have triggered a panic buying of Gold and central banks do not want that.

SO:

WE SHOULD HAVE FIGURED THIS OUT!! I THINK SOROS AND GARTMAN AND OTHERS WERE FIGURING THIS OUT.

There is no meltdown is soft commodities as we speak, it is just to avoid a disorderly price of Gold coming from the Japanese public.

 

Mon, 04/15/2013 - 18:57 | 3453549 NotApplicable
NotApplicable's picture

I'm more inclined to believe this was the latest attempt to scare everyone out of the nearly empty Crimex warehouse. Because, as soon as it implodes, so does their choke-hold over fiat valuations, triggering all sorts of other disasters.

It's all about blocking Gresham's Law from functioning.

Of course, this isn't to say that both our views aren't correct, as they are hardly mutually exclusive.

Mon, 04/15/2013 - 14:48 | 3451605 Room 101
Room 101's picture

Sorry.  My observation is that you should dump now.   Take your hits: get out and buy for less later.  

Take a look at previous crashes.  You don't hit bottom in just 2 days.   Therefore this is probably not the bottom.

Mon, 04/15/2013 - 16:27 | 3452393 auric1234
auric1234's picture

I don't take my chances that physical gold disappears from the market.

When I want to make paper bets, I use 100% paper. I don't risk any of my real money in the process.

 

Mon, 04/15/2013 - 20:17 | 3453914 lotsoffun
lotsoffun's picture

auric1234 - that's real longterm.  it's a nuisance and possible liability shipping physical around (considering you hold it and not warehouse).  personally - i'm 10 - 20 years.  come tell me where the apple stock you bought at 600 is in 10 years.  (i can tell you now.  basically zero - or something like 200 on hyperinflation).  etc.  pm's will still hold value, maybe not your dream - but not the 31 that microsoft is today when i might have bought it at 67 in 2000.

'long term' stocks is goldman's muppet joke.  you want to own stocks - you need to flip them constantly.  especially now.

 

 

Mon, 04/15/2013 - 21:09 | 3454210 MeelionDollerBogus
MeelionDollerBogus's picture

That's why I say I can run faster with my gold than you can with your silver. A lot of purchasing power is very light in just gold.

Mon, 04/15/2013 - 15:03 | 3451722 Smiddywesson
Smiddywesson's picture

I wholeheartely agree with the observation that previous crashes were longer in duration, and that we haven't seen the bottom yet. 

However, I also think the final push to collapse gold prices will likely be accompanied by a complete lack of opportunity to buy at lower prices.  Therefore, even if you could buy and sell your physical for free, you don't want to do so.  Now if we are talking paper gold,  then I completely agree.

Mon, 04/15/2013 - 15:26 | 3451917 Room 101
Room 101's picture

Phyzz and paper are of course different.  I like the saying attributed to the Venetians; the gold never leaves.  If you have paper, now is time to think about letting it go. Phyzz less so, but still a consideration.

I suspect that once the shock settles in, phyzz will still be attainable.

Mon, 04/15/2013 - 20:06 | 3453869 Imminent Crucible
Imminent Crucible's picture

Yeah, I think it would be wise not to buy gold until the price hits bottom and there isn't any physical gold available anywhere.

Like Paul Volcker said: "Joint intervention [by central banks] in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.”

Tue, 04/16/2013 - 02:17 | 3455179 auric1234
auric1234's picture

How do you know it hasn't hit bottom already?

Today I'm buying. If it keeps falling, then I'll buy MORE.

I prefer gold in hand than promise of cheaper gold. After all, the reason we hold gold is that we don't believe in promises.

 

Mon, 04/15/2013 - 14:09 | 3451356 the grateful un...
the grateful unemployed's picture

if you believe in the ALL IN ONE market [i do] then you can't respect a divergence for being anything other than market noise, volatility [BTFD] all ASSETS tend to move together, which is why Obama defends high oil prices at the expense of consumers, if CRUDE falls, MORTGAGES fall, and if MORTGAGES fall, the whole thing collapses. the FED cannot be pleased with this, notice DJIA is joining the party.

why doesn't matter, demand for physical removes gold, raises margin expenses, drives down prices, begets more physical buying. FED could stop this by lowering interest rates, [ooops] what happens now sets the stage for September, the market is putting a gun to the FED heads, gimme more QE. The next really important window is the fall so they may not jawbone much for a few months, and depend on phony economic news, and MSM to carry water for them. meanwhile they can talk up the drop in CRUDE prices as beneficial, [while they know it is not] and lower housing prices as a sign of improvement [not it is not] and Obama can say, the economy is recovering. bully pulpit time.

Mon, 04/15/2013 - 14:07 | 3451337 alien-IQ
alien-IQ's picture

The "price" of Gold and Silver is largely irrelevant. What is relevant is it's purchasing power and that has not changed.

In 1964 one sixth of an ounce of silver bought you a gallon of gas. Today, one sixth of an ounce of silver still buys you a gallon of gas...and ten years from now...it will still buy you a gallon of gas.

Can the same be said for four one dollar bills?

Mon, 04/15/2013 - 14:27 | 3451446 Marco
Marco's picture

On a short time scale the dollar did better this quarter ;)

Mon, 04/15/2013 - 14:36 | 3451517 alien-IQ
alien-IQ's picture

To paraphrase a popular term here at ZH:

"On a long enough timeline, the survival rate for every fiat currency drops to zero"

Mon, 04/15/2013 - 14:02 | 3451303 Optimystic
Optimystic's picture

Barry Ritholtz is an idiot.  ...."It has no true intrinsic value, no cash flow, no earnings, no coupon. no yield."

Substitute "USD" or "EUR" for Gold in his piece & see what you get it.

Mon, 04/15/2013 - 14:04 | 3451326 Middle_Finger_Market
Middle_Finger_Market's picture

Nothing provides a better return than commodities and necessities during times of absolute crisis. 

Mon, 04/15/2013 - 14:32 | 3451488 cifo
cifo's picture

I am wondering what Kyle Bass has to say :)

Mon, 04/15/2013 - 13:54 | 3451234 notadouche
notadouche's picture

Well there is "us" the giant ball of yarn and there are 2 giant cats, the central banks and the financial/political elites. Guess who gets batted around?  All we can do is "drop duck and cover" until they tire of batting us around.

Mon, 04/15/2013 - 13:57 | 3451285 Vooter
Vooter's picture

Or we can infuse our yarn fibers with copious amounts of Zyklon-B...

Mon, 04/15/2013 - 14:04 | 3451321 Middle_Finger_Market
Middle_Finger_Market's picture

Business Insider = 0 credibilty. 

Mon, 04/15/2013 - 13:50 | 3451224 Jim in MN
Jim in MN's picture

 

 

Maybe someone told GE, MSFT, and/or JPM that they have to pay taxes this year.

 

Hence, they need the money today.

Mon, 04/15/2013 - 19:01 | 3453573 NoTTD
NoTTD's picture

Bingreka!

Mon, 04/15/2013 - 13:51 | 3451212 uncle_vito
uncle_vito's picture

deflation

Mon, 04/15/2013 - 13:49 | 3451209 NuYawkFrankie
NuYawkFrankie's picture

Re Why is Gold Crashing?

Guess it must be on account of the fact that gold is: A No Lose Proposition.

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