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Why Is Gold Crashing?

George Washington's picture




 

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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 - 13:50 | 3451197 Bansters-in-my-...
Bansters-in-my- feces's picture

Gold is NOT crashing and Gold is Not falling off a cliff.

Gold is BEING CRASHED and Gold is BEING PUSHED. by finacial terrorist

AKA Central banks and The USA Exchange Stabilization Fund and the BIS.

PLAIN AND SIMPLE.

THIS IS finacial TERRORISM.

Mon, 04/15/2013 - 13:56 | 3451261 NuYawkFrankie
NuYawkFrankie's picture

RE Gold is not Crashing.....

Same result thou as if it was Crashing.

 

I guess, that's why bookies always refund losing bets on horses that were cheated out of a win.

Mon, 04/15/2013 - 14:14 | 3451386 alien-IQ
alien-IQ's picture

Do you see anything else in the market dropping right now or is it just gold and silver?

Mon, 04/15/2013 - 14:23 | 3451436 NuYawkFrankie
NuYawkFrankie's picture

Yes - in the last 2 days, pomegranates have plummeted almost 25c a bushel at my local Farmers Mkt

Mon, 04/15/2013 - 19:16 | 3453650 Bansters-in-my-...
Bansters-in-my- feces's picture

Ya... O.K ...Fwankie

Mon, 04/15/2013 - 13:46 | 3451186 KingTut
KingTut's picture

Gold is money not an investment.  It is also a kind of commodity that has only one use: store of value.  It's not like other commodities because it never gets consumed, the total amount of gold in human possession (stock) just keeps rising. 

Because it has no uses, its price can rise to any level without affecting the economy directly.  In fact, its price can rise high enough to buy everything on the plant, which would be $40,000/oz.  Gold is the only alternative to simultaneously devaluing currencies, so it is the only mechanism for hyperinflation.  That makes it suprememly dangerous to the dollar, that is why it was knocked down today.

The weak hands have been flushed.  Anybody who buys gold on margin has no clue what gold is, and deserves what he gets (hammered).

It feels like Bernanke knows this currency regime is failing, and is preparing the world for a new currency.  The central banks with too little gold are buying it up like crazy. The Chinese bought 100 tons of physical last week (!).  Please explain how that can happen without the price going up?   The elites will use gold to stay wealthy through the transition to a new currency regime.  It's their only option (except bitcoin).

Tue, 04/16/2013 - 04:10 | 3455276 fajensen
fajensen's picture

Or maybe DB got a phone call that "The Troika" would demand next that certain EUR-countries should sell their gold reserves to pay the wig this month?

DB is "too big to fail" and also "too big to prosecute", courtesey of the not-so-aptly-named US Deparments of Justice, so why not use this invulnerability do a little price fixing before the event and some insider trading after?

I know I would!

Mon, 04/15/2013 - 14:45 | 3451568 aerojet
aerojet's picture

I think you may be over-thinking this matter.  Metals are down because someone in Japan got margin called.  It touched off the blaze.

Mon, 04/15/2013 - 13:45 | 3451175 notadouche
notadouche's picture

A lot of "gold experts" talking when most have been mum over the last decade.  What's the difference in gold "crashing" and Apple "crashing"?   Apple buyer's weren't called "worms"  whereas gold buyers are called "bugs" and I suppose and dictators don't steal the country's Apple stash.

Mon, 04/15/2013 - 13:39 | 3451131 Jstanley011
Jstanley011's picture

It's a leading indicator that notwithstanding all of Benny Boy's pranks, we deflationistas have been right all along. Pure and simple.

Mon, 04/15/2013 - 19:57 | 3453821 Imminent Crucible
Imminent Crucible's picture

I wish you deflationistas would get your lazy asses to work on gasoline and groceries.

Mon, 04/15/2013 - 13:40 | 3451130 Flying Tiger Comics
Flying Tiger Comics's picture

For what it's worth and this is direct from the source since we own gold mines, we are getting rushed by serious large scale buyers of physical gold. Insane demand.

 

As for paper gold and other fictions- never made sense, irrelevant to process.

 

Mon, 04/15/2013 - 14:45 | 3451565 Marco
Marco's picture

You're probably seeing the effects of overcapacity in the refinement industry ...

Mon, 04/15/2013 - 14:44 | 3451564 aka Gil
aka Gil's picture

Smash the price and have your minions rush to the producers to demand gold on the cheap. Elite in their own small minds and in the smaller minds of their boot-licking serfs, fucking sleaze to anyone else.

Mon, 04/15/2013 - 14:44 | 3451560 Smiddywesson
Smiddywesson's picture

That's food for thought.  Among my many failed predictions about how this crisis would play out, was an observation that gold would get an unrestrained final beat down, because the people with the power to do so would no longer have to be covert or save their powder.  The banks that have cooperated in purchasing gold while holding down the price will no longer have it in their mutual self interest to restrain their behavior at the end game.  This will be a final phase where every dirty trick, to include tsunami like price crashes and new legislation, all designed to pry every last coin from your grip.  After they destroy people, they will use their victim's examples to restrict the trade in gold for our own good. 

This has been the largest crash in 30 years, and we are hearing about panicked buying from producers.  Could it be end game is at hand? 

Mon, 04/15/2013 - 19:02 | 3453590 NoTTD
NoTTD's picture

Check with me this time tomorrow.

Mon, 04/15/2013 - 15:51 | 3452117 zapdude
zapdude's picture

Yes, it could be.

I only hope I sell my house quickly (goes on the market this week) and can put a good chunk of the equity into gold at these ridiculously low prices while I move to a rental home.

I've seen one doomsday clock set for March 20, 2015: Full solar eclipse, Jewish new year, day 1 of year 6,000 in Hebrew calendar.  Timing seems about right, but who knows...

PS - Haven't seen you comment in a while, welcome back smiddywesson.

Mon, 04/15/2013 - 13:41 | 3451128 Manthong
Manthong's picture

Great summary, GW.

Gold crash?..

I have a gold watch that is worth more today used than it cost new (>20 years ago)

I have a pre1965 quarter dollar silver coin that is worth as much gasoline as it was 50 years ago.

If everything else I ever invested in crashed like that I would be very happy.

Mon, 04/15/2013 - 13:40 | 3451119 Kreditanstalt
Kreditanstalt's picture

All that remains is to watch PERMANENT GOLD BACKWARDATION become established.  That will terrify TPTB, wrecking the COMEX paper game.

Mon, 04/15/2013 - 18:41 | 3453461 NotApplicable
NotApplicable's picture

What? You don't think they can't sell down any and all months?

All you need is a friend named Ben with a magic checkbook.

Mon, 04/15/2013 - 13:36 | 3451102 shutdown
shutdown's picture

The largest gold and silver dealer in Portland, Oregon, has ceased accepting internet orders until further notice.

Interesting. Have others done the same? 

Mon, 04/15/2013 - 16:56 | 3452650 WTFisThat
WTFisThat's picture

Kitco site? try to buy some gold today, good luck!

Mon, 04/15/2013 - 13:37 | 3451098 Everyman
Everyman's picture

Barry Ritholz is an idiot.  Clearly a MMT mental midget.  Can't read wht he writes anymore.  The stupid makes my head hurt.  Krugman wantabe.

Tue, 04/16/2013 - 04:48 | 3455301 Treason Season
Treason Season's picture

Barry Ritholz = CFR = Rocky/Roth waterbucket boy.

Mon, 04/15/2013 - 13:35 | 3451096 CheapBastard
CheapBastard's picture

One reason is there were tons of margin calls when AAPL plunged 40%. After all, it was aid to be "the most widely held stock."   I read even the central bank of israel bought AAPL at aournd 588.

Investors were forced to sell some of their few "good" assets....PMs being one of them to cover.

jmho

Mon, 04/15/2013 - 13:34 | 3451089 gaoptimize
gaoptimize'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. 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."

So MDB is either writing for or being picked up by Business Insider?

Mon, 04/15/2013 - 21:06 | 3454183 MeelionDollerBogus
MeelionDollerBogus's picture

I have long suspected Joe Weisenthal is MDB. Almost every comment is of a high level of ignorance & arrogance that indicates it very strongly.

Mon, 04/15/2013 - 13:33 | 3451083 MyBrothersKeeper
MyBrothersKeeper's picture

Actually when you look at true gold valuation that considers world population, gdp etc etc gold is probably priced about right for the first time in quite awhile.  When the dollar starts to fall again, the opportunity will be there.  I just don't expect much dollar depreciation until after Japan or someone in Europe defaults.....the gold might be the save haven play that trumps all others.

Mon, 04/15/2013 - 21:06 | 3454180 MeelionDollerBogus
MeelionDollerBogus's picture

“Actually when you look at true gold valuation that considers world population,”

Valuation of money has no relationship to population size, only the availability of goods and whatever is used as money.

Mon, 04/15/2013 - 13:33 | 3451078 UK debt marsh
UK debt marsh's picture

Duh.

More sellers than buyers.

Top that.

Mon, 04/15/2013 - 21:05 | 3454175 MeelionDollerBogus
MeelionDollerBogus's picture

Duh, there’s more buyers than sellers for the physical, that's why so many sites can't even fill orders, have no inventory, all over the damn place. There’s just a very large amount of paper coming from a handful of sellers. Obviously the miners & coin / bar dealers are selling what they can but many have delayed inventory flow & stopped orders.

Mon, 04/15/2013 - 13:52 | 3451236 24KGOLD FOIL HAT
24KGOLD FOIL HAT's picture

The sellers may be Emperors but they have naked shorts.  In a few days all will see the absence of Merrill's clothing.

Mon, 04/15/2013 - 13:41 | 3451148 Kreditanstalt
Kreditanstalt's picture

Sellers & buyers of WHAT?  Paper gold?

As long as puts, calls, futures, options and unallocated accounts, in all of which no metal ever changes hands, are permitted to be contributaries to the "gold price", these games will continue.

Mon, 04/15/2013 - 14:50 | 3451609 Marco
Marco's picture

Just so I have it straight ...

Shorting of stocks -> good for price discovery

Shorting of gold -> evil price manipulation

Is that about right?

Mon, 04/15/2013 - 21:04 | 3454165 MeelionDollerBogus
MeelionDollerBogus's picture

No that’s not about right. Shorting more of a thing than is available is fraud – stock, gold, silver, wheat, whatever. Fraud is illegal and dangerous. Short all you want of what is real & available – that is price discovery. Fraud is price deception.

Mon, 04/15/2013 - 16:54 | 3452626 auric1234
auric1234's picture

C.f. Short vs Naked short

 

Mon, 04/15/2013 - 14:19 | 3451418 Spectre
Spectre's picture

+100.  The truth and as far as i'm concerned if we hadn't had the formation of Metal ETF's we would not be talking about this change in price.

Mon, 04/15/2013 - 19:49 | 3453786 Imminent Crucible
Imminent Crucible's picture

Exactly so. TPTB were happy to allow the creation of frauds like GLD and SLV--to divert buying demand from physical bullion to paper contracts. Without them, the Federal Reserve Note would be Game Over already.

Mon, 04/15/2013 - 13:32 | 3451070 akak
akak'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. 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.

This guy is not just drinking the establishment's Koolaid --- he's swimming (and drowning) in it.

Mon, 04/15/2013 - 21:45 | 3454434 mkkby
mkkby's picture

When I read that quote I thought /sarc was missing.

Mon, 04/15/2013 - 19:48 | 3453773 Imminent Crucible
Imminent Crucible's picture

The Fed's Neo-Keynesian Monetarist abortions "have largely panned out"?!!  Holy crap--is Wiesenthal for real on this? He really thinks that the Fed's policies of the last, oh, hundred years or so have worked out pretty well?

Let's see: US dollar lost 97% of its purchasing power---check.

The nation drowning in unpayable debts---check.

Bond bubble after mortgage bubble after stock bubble destroying pension funds and savers everywhere---check.

The lowest work force participation rate in 34 years---check.

The Fed now forced to buy most of new Treasury issuance---check.

Banks everywhere too capital-impaired to function legally without free money from the Fed and Mark to Unicorn accounting---check.

God help us--they've given the microphones to the village idiots.

Mon, 04/15/2013 - 20:28 | 3453979 lotsoffun
lotsoffun's picture

it's all good.   besides - you didn't mention how housing and manufacturing and car sales have 'recovered'  - again.  god bless us all - this bernake, geithner (why did he leave us?), obama gang has really got it all covered.  besides lloyd and jamie and brian.  too bad vikram bandit left citi - i don't know the new guy.  he went up 30%!!  this is so cooool.  prosperity for everyone.  everything you ever wanted on credit for free that you never have to pay back.  better than willie wonka.

Mon, 04/15/2013 - 16:17 | 3452312 Hedgetard55
Hedgetard55's picture

Sounded just like MDB!

Mon, 04/15/2013 - 13:28 | 3451054 Schmuck Raker
Schmuck Raker's picture

What is the view of One Point Two Billion Indians?

Mon, 04/15/2013 - 20:31 | 3453987 lotsoffun
lotsoffun's picture

  schmuck raker - your job.  and everything else you have, once you've got no bid and they do.  and they undercut to make that happen.

Mon, 04/15/2013 - 13:43 | 3451164 Rory_Breaker
Rory_Breaker's picture

I bought some on saturday. My jeweler's shop was full of customers when I went there. But I have to say the news on TV and the online news sources are making it sound like the death knell for gold is ringing.

 

http://www.moneycontrol.com/news/commodities/retailers-expect-gold-price...

http://profit.ndtv.com/news/cheat-sheet/article-five-reasons-why-gold-ha...

http://articles.economictimes.indiatimes.com/2013-04-14/news/38529220_1_...

http://blogs.timesofindia.indiatimes.com/Swaminomics/entry/gold-the-part...

Mon, 04/15/2013 - 14:47 | 3451589 aerojet
aerojet's picture

They have been herding the sheep into this trade for well over four years!  It was time for it to blow. 

Mon, 04/15/2013 - 21:02 | 3454160 MeelionDollerBogus
MeelionDollerBogus's picture

Sheep can’t afford gold, some can afford silver but most have debt and don’t even know that you can get gold or silver at all in your very own hands.

Mon, 04/15/2013 - 13:50 | 3451220 mayhem_korner
mayhem_korner's picture

 

 

The death knell for gold is ringing.  Whoever doesn't hold it now is pretty much a carcass in the waiting.  And isn't that what the last two days has been about?

Mon, 04/15/2013 - 14:39 | 3451536 Rory_Breaker
Rory_Breaker's picture

we love 'aping the west' as we call it. if the western press says gold is bad then it must be so.

(that's just what the media would love to believe)

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