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Into The Gold Labyrinth

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Gold_Labyrinth

The surprise of 2014 is gold! The yellow precious metal had its fourth week of gains in a row. It seems like the gold market has been ‘set free’ in 2014. This would mean the end of the cyclical correction, which indicates that the market is ready for the big and final phase of the secular bull run in gold. All of this fits perfectly with everything we have been saying for years about gold.

For those who didn't notice, please read our free Guide to Gold.

One thing becomes very clear here: gold is moving from the West to the East. Chinese gold import from Hong Kong has been rising dramatically since 2011 and at the same time, the gold price has seen a 30% correction. This brought up a lot of questions from subscribers.

Hong-Kong-China-monthly-net-exports-gold

Source: Toqueville Funds / Bloomberg

"How is it possible that the price goes down when there is huge demand?!” To know the answer you have to look at the futures market. Because that is where the market price for gold is set. Yes, you read it well: paper contracts dictate the price of the physical metal.

Since 2011 there are a lot of ‘sell contracts’ for gold, better known as short positions. This caused huge downward pressure on the gold price. An ideal way for China to buy physical gold cheaply. But the Chinese were not the active shorters. American investment banks did that, with JPMorgan in the lead. JPM, AKA, the ‘banker’ of the US government.

JPMorgan built up an historical short position over the years. But at the same time, the bank was bringing in more and more physical gold to store it in its vault below the famous Chase Manhattan Plaza in New York. Where does this gold come from? Just look at the chart for the registered physical gold at warehouses with the COMEX, the American futures market.

COMEX warehouse gold

Source: 24hGold

The COMEX has been sucked dry in the last year. You will never guess who recently signed a sale agreement for the JPM building in the center of New York, underground gold vaults included… yes, you got it, the Chinese!

Those who want an even better view, should check out the next photo of the new situation in NY.

JPMorgen Chase Manhatten Building now belongs to the Chinese

(H/t Koos Jansen)

Yes, that is correct, the vaults of the Fed are right across from the Chase Manhattan Plaza. Coincidence? We do not think so... But the reserves in the US are naturally insufficient to satisfy the Chinese hunger for gold. The effect of the price correction made sure that the ‘weak hands’ in the gold market let go of their gold. Weak hands is a synonym for (small) investors.

Since the rise of the SPDR Gold Trust ETF (GLD) in 2007, more and more investors committed larger amounts of capital to the gold ETF. At the peak of the market there were 1,300 tonnes of gold in GLD, more than countries like China. That was also not part of the Chinese plan. You probably understand by now where this is going. When the gold price got shaken up, those same investors stepped out of GLD.

Meanwhile, more than 500 tonnes of gold was pulled out of GLD, which implies that the ETF has less than 800 tonnes of gold today.

GLD tonnage gold holdings

Where did all this GLD gold go? From the vaults in London, to the smelters in Switzerland to the depots in… Hong Kong! And now we are full circle again: the enormous transfer of gold from Hong Kong to China. All of this – large scale price manipulation in combination with huge gold transfers – is not a walk in the park. All parties need to cooperate.

So it would be hard to imagine that it did not happen with the approval of the US government and the Fed. And probably forced by China! Let us clarify that. China has stopped buying US debt since 2011. That was also the moment that the Fed needed to jump in to support the market. After QE we quickly saw QE2, QE3…

QE Fed base

Without these actions from the Fed there would not have been a single buyer of US Treasuries, which would probably mean the end of the American empire. China wanted, or rather demanded, its gold from the West! You can say many things about the Chinese but they certainly are not dumb.

The Chinese realized that for years they received a poisoned gift from the Americans. Only through the acquisition of gold, both world powers would be on a ‘level playing field’ again. Of course, we do not know where this level playing field is, but we do assume that China has more or less reached it. How much gold landed in China since 2011, is very hard to determine. In 2013 alone, more than 2,000 tons was transferred from Hong Kong to China. And this is just one of the import routes. China is not just buying gold from its own gold mines, but is also directly or indirectly the largest customer of most gold producers. All melted gold also found its way to China.

In short, China was the gold market in the last two years!

However, we are spotting a few signals indicating that China is releasing its grip on the gold market. Not only has the continuous drain from GLD stopped, but we also read that China has started buying US Treasuries again. Even more, the Chinese portfolio of US government bonds is at record levels! Now you also know why the American central bank suddenly started ‘tapering’, or scaling back the buyback program of US debt.

Does China have enough gold then? It would not surprise us.

A small calculation taught us the following:

  • The US owns more than 8,000 tonnes of gold while the yearly US GDP is just shy of 16 trillion dollars. The yearly GDP of China is a little over 8 trillion dollars, almost half. You would expect then that the level playing field for gold in China hovers around 4,000 tonnes.
  • The official amount of gold in the Chinese central bank is still 1,054 tonnes today, but because of the huge gold transfers these last years, we expect that China is close to its golden level playing field.

We do admit, it is a lot of information to digest, but it is extremely important! You have to understand that the US, with the largest pile of debt in the world, would be helped hugely by a higher gold price. The higher the value of gold, the lower the real value of their debt. We have the feeling that if China loosens its grip on the gold market, the gold price can move up quite fast. There is nothing that America wants more and China is now well-hedged.

Where can the gold price go to then? Another small calculation to help us out...

The historical ratio of the monetary base of the Fed teaches us that a gold price of 5,000 to 7,000 dollars/ounce should be enough for the US to make its debt bearable again. From the current level this means at least a quadrupled gold price. For most people this seems improbably high, but do not forget that since the start of the secular trend in gold, its price already went 5x higher. Also in the 70s, the gold price skyrocketed in its second phase from 100 dollars to 850 dollars per ounce in barely four years!

As for now, we're in the midst of the bottoming proces with gold. Once this proces ends- lets say above 1,300 dollars - the gold price could see a voilent upswing towards 1,550 dollars, where the next battle field arrives for gold. We prefer to play the next U-turn in gold with a selection of quality gold stocks, as the current leverage to the gold price - risk/return - is the best in years, even decades!

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Mon, 01/20/2014 - 19:01 | 4349508 MeelionDollerBogus
MeelionDollerBogus's picture

since we all know 4 weeks sets the trend for the next dozen years I'm convinced & all in!

Mon, 01/20/2014 - 14:28 | 4348613 Gordon_Gekko
Gordon_Gekko's picture

All "US", "Germany", "XYZ country" gold is now either in powerful private bankster hands or intelligent investors' strong hands. The past two years have eliminated all foolish and weak hands from the [physical] gold market. All government/CB vaults will be found to be empty when the shit finally hits the fan. Shit is now compressed like a massive motherfucking spring.

Mon, 01/20/2014 - 13:50 | 4348505 lasvegaspersona
lasvegaspersona's picture

Odd that the (by a factor of about 10x) biggest maker of the gold price, the Forex market, is not mentioned. Forex trading dwarfs all other markets and AUX/XXX is one of the biggest movers.

Imagine if you have AUX but need Yen. Pick up the phone and 'sell gold buy yen'. This could move the gold price down by more than all the physical gold moved in a month if the order is large enough.

Fofoa dealt with this in October.   http://fofoa.blogspot.com/2013/10/gold-as-forex-currency.html

No other analysist sees it all as clearly. Maybe that is because fofoa is not selling miners and paper promises...I dunno, just a guess...

Mon, 01/20/2014 - 14:13 | 4348585 SAT 800
SAT 800's picture

There is no reason for anyone to own any Gold Mining Stock; and anyone who shills for mining stocks should not be listened to. What's wrong with a mining stock? Well, firstly, it's a stock. You might need to meditate on that.

Mon, 01/20/2014 - 12:45 | 4348365 Conax
Conax's picture

I have heard the 8000 tons BS forever.  The way they hold prices in the toilet, their pile has to be more-or-less gone.

We can never figure these things out because we have no facts.  When a hypothesis is based on unreliable data, what use is it?  Until there is an independent audit, all we (as blinkered proles) can do is try to accumulate (or at least hold what we have) and stay alive long enough to see it come to fruition.

It's a long road.

 

Mon, 01/20/2014 - 11:30 | 4348145 juicemoney
juicemoney's picture

The US owns more than 8,000 tonnes of gold while the yearly US GDP is just shy of 16 trillion dollars. 

You have to understand that the US, with the largest pile of debt in the world, would be helped hugely by a higher gold price. The higher the value of gold, the lower the real value of their debt.

Wow, yet another blogger who takes government statistics at face value. Consider the following:

  • US has not allowed an audit of it's gold in almost 50 years
  • The Comex shows obvious signs of manipulation, look at how many times it has been shut down temporarily due to high volume sales
  • Germany recieved 5 tons of gold this year vs the 84 tons required to meet the deadline.

It doesn't take much critical thinking to arrive at the simplest conclusion, The US doesn't have any gold they can transfer! Now whether they actually have any gold at all or whether it is hypothecated doesn't make much difference at this point. Given they most likely don't have any gold, this supression of the gold price can still go on. When you have the Exchange Stabilization Fund, most of NATO, the corrupted big banks and the Federal Reserve vying to keep gold supressed with billions of dollars of funny money, you should expect more turbulance this year.

I think that TPTB are running out of steam but they aren't done yet. The next barrier could be $1,550 but I think the serious investors still have to ride out more waves. The big ponzi still has some gas if you ask me. No matter, low price = buying opportunity. I'm not too worried. The more time I have to convert monopoly money into something durable, the better.

Mon, 01/20/2014 - 13:27 | 4348451 Joebloinvestor
Joebloinvestor's picture

The devil is in the details.

The US counts as its' "gold reserves" the unmined gold on federal land.

The only country to get away with this shit.

Mon, 01/20/2014 - 13:55 | 4348527 lasvegaspersona
lasvegaspersona's picture

joeblow

details please....where do you get the 'federal lands thing? I'm sure there is a LOT more than 8k tons in my state alone, not economical of course, but it is there.

After WW2 the US had 22k tons...no one said it was a myth then. By 1971 it was down to 8k tons, no one doubted that.

Mon, 01/20/2014 - 11:09 | 4348088 RaceToTheBottom
RaceToTheBottom's picture

Interesting that it is always the Chinese with the Gold machinations.  The Indians are apparently just dolts who continue to try and hold their purchases down....

They want their due in the world manipulation game!

Mon, 01/20/2014 - 11:29 | 4348138 rehypothecator
rehypothecator's picture

It is curious that India chooses to do the opposite of China's power play.  Rather than encouraging its citizens to buy gold, it increases import duties, bans products, and otherwise tries to prevent the accumulation of gold.  When the Great Revaluation takes place, I wonder if there might be some bounties over there, too.  

By the way: The revaluation will not be televised.  

Mon, 01/20/2014 - 11:24 | 4348124 robertsgt40
robertsgt40's picture

If the Fed has 8000 tons of gold, how come Germany can't get theirs?

Mon, 01/20/2014 - 10:56 | 4348041 topshelfstuff
topshelfstuff's picture

Its true that the price we see has been in the 1,200 - 1,300 range and we have seen gold drop at unusual times, when it would have been expected to go up ... but Consider this "Suppose"...Suppose that a Secret deal was struck with the US & China Top level few, and China got to Buy Gold using its massive amount of US T-Bonds, But at a maximum of 50 cents on the USDollar. IOW, it takes $2,000 in Face Value Bonds for each $1,000 in Gold Purchases ... actual transaction amount would be at least Double what we see, and the possible effect of China Dumping its US Bonds, a real concern back in 2011, has been "handled"...Secretly

Mon, 01/20/2014 - 10:24 | 4347940 BigSimes
BigSimes's picture

Let's *hope* Gold continues to go up.

Who ever pushes it down, Ben/Janet/Cartel & Co or China or 'sentiment', that has to switch first. So far so good fro 2014.

Otherwise we are just (golden) pissing into the wind with our mouths wide open.

Mon, 01/20/2014 - 10:42 | 4347979 Tall Tom
Tall Tom's picture

Let's hope that Gold continues to decline. I like buying at bargain basement prices.

 

I only want increased prices if I want to sell it...which I do not intend on doing.

 

I do not value the US Dollar. But when the price of Gold increases it means that the Currency is dying and becoming less valuable. I want even more time to prepare for that inevitability. I want some more reprieve.

 

With Gold I will guarantee that you will end up POOR. Without Gold you will end up DESTITUTE. That is how bad that it is going to get.

Mon, 01/20/2014 - 13:58 | 4348538 lasvegaspersona
lasvegaspersona's picture

Tall Tom

you must be young and full of 'piss and vinegar'. We older gentlemen are ready now.

Mon, 01/20/2014 - 14:44 | 4348645 Tall Tom
Tall Tom's picture

I am 55 Years Young this year. I have got Twenty Years more in me.

Mon, 01/20/2014 - 10:05 | 4347894 Billy Sol Estes
Billy Sol Estes's picture

Gimme da gold, I wanna know where da gold at, I'm gonna drive a backhoe up there and find da gold

Mon, 01/20/2014 - 09:55 | 4347874 fijisailor
fijisailor's picture

Here's a new way to buy gold in bill form you can put in your wallet.  Costs about 2X spot.

http://shop.valaurum.com/Peak-Prosperity-Aurum-1-10g-PP1.htm

Mon, 01/20/2014 - 09:31 | 4347824 Sufiy
Sufiy's picture

With the highest on record leverage at COMEX of 112 owners for every single ounce of Gold and record low COMEX registered Gold at 11 t we have the set up for the major blow out phase in the Gold market. Who in their mind will continue to hold Gold at LBMA any more? According to Eric Sprott, we can expect a failure to deliver Gold and lawsuits with deliveries last February from COMEX of 40 t and China buying at least 100 t of Gold every month on average now.
  Once Gold will breach $1270 level Andrew Maguire's discussion about the massive short squeeze will become the reality and even if his predictions about $200 Up-days will not materialise, the move by Gold to the upside from the most oversold condition in history will be nothing less than spectacular.

 

http://sufiy.blogspot.co.uk/2014/01/there-is-no-german-gold-left-at-new....

Mon, 01/20/2014 - 12:55 | 4348381 NIHILIST CIPHER
NIHILIST CIPHER's picture

sufiy           Your blog is totally in the weeds with the attention it pays to electric cars and lithium . Keep your eyes open for a game changer in 2015. And you're in the weeds with bitcoin also.

Mon, 01/20/2014 - 10:36 | 4347966 Fuh Querada
Fuh Querada's picture

your silly blog solely regurgitates material posted elsewhere. Kindly cease pimping it on ZH.

Mon, 01/20/2014 - 09:31 | 4347823 apberusdisvet
apberusdisvet's picture

Wait until the US population realizes that there is no gold in Fort Knox and we have been sold out to the Chinese in order to maintain the corrupt status quo.  The bounties posted for politicians should be interesting.

Mon, 01/20/2014 - 19:26 | 4349605 MeelionDollerBogus
MeelionDollerBogus's picture

Who's going to pay out? The broke people?

Mon, 01/20/2014 - 10:52 | 4348018 ltsgt1
ltsgt1's picture

US population is so brainwashed that they wouldn't care even if they knew all of our gold have been sold.

They wil raise up only if they could somehow manage to understand that gold Is real money rather a banking tradition.

Mon, 01/20/2014 - 13:53 | 4348514 JackT
JackT's picture

I have to agree. The avg joe is so far removed from gold that they could care less. Something like only 2% of the US investing population even have anything close to resembling gold in their portfolios and of those it's less than 1% of their holdings. Take one step back and determine the amount of US population that even have a "portfolio" - and this number declines even further as they struggle each month to maintain their debt payments.

As far as they are concerned you can't eat gold

Mon, 01/20/2014 - 10:44 | 4347980 dmger14
dmger14's picture

If the US has no or little gold, as indicated as possible with its repatriation to Germany of a measly 5 tons (the rest from the UK), then the US would NOT want gold to rise in dollar terms, but may have little ultimate control on prices (or premiums) in the physical market due to shortages  MAYBE the US does have the gold and doesn't want to part with it because it wants to have it when prices do explode.  No matter what, people owning some physical ounces seem like a no-brainer to me.

Mon, 01/20/2014 - 11:46 | 4348191 ltsgt1
ltsgt1's picture

I concur, the USG will allow gold price to rise freely only at the point of surrendering her reserve currency status.

As long as the democrats and the rinos republicans are in power, reserve currency status must be kept to keep the entitlement gravy train going.

If we had a tea party president in 2016, we probably would lose the reserve status by balancing our budgets and trade deficits. We would have a sever recession if we don't print money at that moment and we would have inflation if we do which I believe is the best scenario - jobs should be available for almost everyone since we can't import cheap oil and trinkets anymore, wages and gold price should go up with everything else according to free market.

If we had another redistributing democrat or rino republican in 2016, we would probably lose the reserve status by QE to infinity to fund various entitlements. When we cannot sell gold to China in exchange for their support of the dollar, they will stop buying our debts. We will have hyperinflation when the fed is the only buyer left. Gold will hit stratosphere.

Come to think of it, there might be another scenario. When we ran out of gold, the Chinese would start buying our lands for oil, foods and minerals. We will have jobs but we will be working for the Chinese.

Mon, 01/20/2014 - 10:35 | 4347963 Tall Tom
Tall Tom's picture

The Bounties will be paid in ounces...not US Dollars.

 

How many ounces have you set aside for bounties?

Mon, 01/20/2014 - 09:26 | 4347815 fijisailor
fijisailor's picture

Is this author even awake?  If the US only delivered 5 tons to Germany last year then the US probably doesn't have any gold.

Mon, 01/20/2014 - 13:32 | 4348457 RafterManFMJ
RafterManFMJ's picture

Or perhaps the US has been boosting its own supply of gold, by cleverly moving bars from the bin labeled 'Germany' to one labeled 'USA.'

HA-HA! So easy, a caveman could do it!

And that swarthy N African has a nice stash of gold... Sorry Kadaffy, you gotta go!

Perhaps, just perhaps, when they devalue the dollar by 30 percent (first wave) against gold, we'll find out old Uncle Slaver has more gold than we thought...

...and countries like Germany have less than they were counting on.

Mon, 01/20/2014 - 11:49 | 4348198 tarsubil
tarsubil's picture

Who knows? It could be that they are simply unwilling to give it up because they know its true value.

Mon, 01/20/2014 - 13:50 | 4348503 oddjob
oddjob's picture

Given the track record of present and past administrations that Gold was looted long ago.

Mon, 01/20/2014 - 09:02 | 4347778 Its_the_economy...
Its_the_economy_stupid's picture

"The US owns more than 8,000 tonnes of gold" only if it has it in its posession.

"Precious, yes, we loves our precious."

Mon, 01/20/2014 - 09:34 | 4347826 SafelyGraze
SafelyGraze's picture

"Let us clarify that. China has stopped buying US debt since 2011."

and yet ...

china now holds a record 1.3T of us debt

http://rt.com/usa/china-holding-us-debt-record-726/

so if China has stopped buying us debt, then somebody has been giving it away to China

 

Mon, 01/20/2014 - 10:56 | 4348043 dmger14
dmger14's picture

I was confused by that too.  I think what he meant to say is China had stopped buying debt for roughly 2 years.  Now that gold prices have been low and China has accumulated enough to back its currency in the same proportion as the US, it has bought a little more of our debt.  I think his point is that there was cooperation between the US and China. 

Mon, 01/20/2014 - 12:25 | 4348317 LawsofPhysics
LawsofPhysics's picture

"I think his point is that there was cooperation between the US and China. "  -  This has been the case since 1971.  In fact, China has a direct buy/sell line with the treasury.  Doesn't soound too constitutional to me...

and still no revolution.  Stupid sheep.

Mon, 01/20/2014 - 10:50 | 4348006 Tall Tom
Tall Tom's picture

US Debt pays INTEREST. If you hold the Debt and not purchase anymore then your holdings STILL INCREASE.

 

You are on a Financial Site and do not understand Compounding Interest??? Well I guess that we are all here to learn something.

 

But wasn't that covered in Econ 101?

Mon, 01/20/2014 - 19:37 | 4349635 MeelionDollerBogus
MeelionDollerBogus's picture

interest is in DOLLARS and is not counted as TREASURY DEBT held.
Maybe you are the one who failed the class.

ONE item is DEBT HOLDINGS. Which mature, decreasing, and pay interest in CURRENCY not in further bonds/treasuries.
The other item is FOREIGN CURRENCY RESERVES, and in China what is not yuan/renminbi is FOREIGN and it's CURRENCY.
They are not the same thing.

Mon, 01/20/2014 - 09:18 | 4347801 StychoKiller
StychoKiller's picture

Tricksy Chinamanses, they tooks it!

Mon, 01/20/2014 - 13:45 | 4348489 john39
john39's picture

they bought it on the market.  the real thieves are the those who sold/leased/stole the gold from the American people.

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