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The Death of Gold... Or Not!
Submitted by Jordan Eliseo via ABC Bullion,
Precious metal investors suffered yet another rude shock early this week, with the price of gold plunging below USD $1100oz, with a nearly USD $50oz sell off occurring in a matter of minutes in early Asian trading on Monday the 20th July.
In total, some 5 tonnes of gold was dumped on the Shanghai market in this two minute window, an extraordinary amount when one considers DAILY trading volume is typically in the vicinity of 25 tonnes.
At the same time, according to ANZ Bank, there was also 7,600 August 2015 gold contracts traded on the COMEX, equivalent to another 23 tonnes of metal.
The market has since bounced around, trading back above USD $1100oz at one point, though this morning we see that the metal has eased again, currently sitting at USD $1,091oz, whilst silver has fallen below USD $15oz, with the gold/silver ratio now sitting at 73.82
Australian dollar investors have not been spared this time around, with the AUD price falling back below AUD $1500 per oz. Year to date, this has reduced gains (yes, investors are still UP for the year in local terms, albeit mildly) to just 2%, though the recent sell off has also led to marked increase in trading volumes for bargain hunting physical buyers.
China Gold Announcement
Whilst the majority of the sell off in gold reflects extreme pessimism and aggressive short positioning in the markets (more on this below), perhaps some of the weakness in gold prices this week can be tied back to the Chinese announcement on Friday the 17th regarding their updated physical gold holdings.
To recap, on the 17th Juy 2015 the Chinese government announced that national gold holdings had increased to 1658 tonnes, up some 57% in the past 6 years. Based of these figures, the Chinese state has been buying roughly 100 tonnes of physical gold per year for the past 6 years.
This number disappointed many analysts and gold bulls who thought the number would be somewhere between 3,000 and 5,000 tonnes.
Despite the much lower than expected announcement, the updated figures still put China in fifth spot when it comes to the largest national gold reserves, behind the United States, Germany, Italy and France. Despite this, physical gold holdings still officially represent less than 2% of China’s massive foreign exchange reserves.
So what to make of it?
A few months ago, we wrote a piece for Livewire that specifically discussed Chinese national gold holdings. Titled “There are known knowns, known unknowns, and unknown unknowns”, we stated that whatever the number ended up being, “we think the number will offer plenty for both the bulls and bears to argue about, and we’re almost certain it won’t move markets as some expect”.
Whilst the sell off in the gold market this week might lead some to argue we were wrong regarding the impact of the announcement, we are happy to stand by our comments, for a few reasons.
Firstly, it is worth mentioning that China does not just hold physical gold through the People’s Bank of China (PBOC). They can also hold gold through the State Administration of Foreign Exchange (SAFE), and the China Investment Corporation (CIC).
When it comes to SAFE, one of their major functions is; “to undertake operations and management of foreign exchange reserves, gold reserves, and other foreign exchange assets of the state.”
The CIC on the other hand is a Chinese sovereign wealth fund. Founded in 2007 with roughly USD $200 billion of investment capital, it had grown to well over USD $550 billion by August of 2013. As at the end of December 2014, some 26% of this money was sitting in what the CIC describe as long-term investments, which include resources and commodities specifically.
As a result, we’re relatively certain that Chinese national gold holdings across all the entities it controls are higher than the official number, though it remains a known unknown as to what the true figure is.
It is also worth mentioning that if Chinese national gold holdings really only are in the vicinity of 1,600 tonnes, and that the Chinese state has been doing far less buying than many anticipated, then by default it means the Chinese citizenry have been doing more buying than might have originally been anticipated.
At the end of the day, we know that thousands of tonnes have been shipped into China in the past few years, and we also know that China is now the largest miner of gold.
We’re quite certain that the gold imported and mined hasn’t been thrown away, so if the state wasn’t buying it, someone or a group of someone’s, clearly has been.
Finally, it pays to remember the game that China is playing. At present, getting the yuan included as part of the SDR is a major priority, therefore announcing respectable but not threatening levels of national gold reserves, and not doing anything to potentially cause gold prices to rise makes plenty of sense from a Chinese perspective.
But don’t forget for a minute the long-term plan, which Song Xin of the China Gold Association has alluded to previously, that being the accumulation of at least 8,500 tonnes of gold over time to at least match/exceed the United States sovereign gold reserve.
Bottom line: China will be a net buyer, and a net importer of physical gold for years to come. In and of itself that won’t necessarily cause a sharp rally in gold prices anytime soon, but gold acquisition from the Chinese state and her citizens, as well as emerging market central banks the world over will continue to provide support for the physical gold market.
Those that have sold gold in the past few days (and there have been plenty in the ETF and futures markets) as a result of the “disappointing” number out of China may have just caused the capitulation event that typically marks the bottom of any bear market.
The Death of Gold
And so we come to the “Death of Gold”, a headline we saw earlier in the week accompanying a story about a particular ASX Stock that had soared 400%, alongside a sales pitch for investors imploring them to part with their hard earned cash for more stock tips. This headline capped off a week of unanimously bearish stories on the future prospects for gold, just some of which we’ve included below as images.
Even in the depths of the GFC induced bear market in equities, the headlines, commentary and analysis that surrounded the stock market was not as pessimistic as the commentary that surrounds gold today.
The lack of inflation and a much anticipated interest rate hike by the Federal Reserve are the key reasons cited for the bearishness towards the precious metal market. Whilst this is understandable, it is also overly simplistic, with investors and analysts clearly forgetting the strong return of gold for the majority of the past 15 years, though inflation predominantly trended lower over this entire period, which has been interspersed with hugely deflationary events like the NASDAQ crash, the GFC, the European debt crisis and even lately, the flare ups in Greece and the Chinese stock market.
Investors have also clearly overlooked the fact that three of the fastest period of gold price appreciation in history, 1971 to 1974, 1976 to 1980 and 2001 to 2007 occurred during periods of Fed tightening, indicating that higher rates alone are clearly not enough to sink the gold market. That fact often shocks people who buy into the simple narrative regarding gold and interest rates, which is why the following slide typically raises a few eyebrows when presented at investment conferences and the like.
But be that as it may, the market is a voting machine, in the short term at least, and right now the votes are clearly going against the gold market, with ETF outflows picking up pace, and speculative positioning at record levels, with well over 100,000 money manager contracts short gold , as you can see on the chart below.
We are not in Kansas anymore.
Gross short positions in total, across all market participants, were also at a record 180,000 contracts, with net positioning at the lowest level since November 2014. Speculators using the futures market to express a position in gold have never been this bearish!
On the ETF front, last Friday saw 11 tonnes of gold divestment out of the SPDR Gold Trust, the largest single day outflow since 2014. For an understanding of highly correlated gold price moves are to the flows in and out of ETFs, consider this excellent chart from ANZ, which plots the two side by side over the past year.
As you can see, investors in gold ETFs tend to follow the momentum of the gold market, and the price action itself, and are no doubt heavily influenced by some of the commentary they’re seeing regarding gold right now, with Societe Generale’s Robin Bhar recently stating; “If anyone can show me the bullish case for gold, I’d like to see it. I doubt this is the final nail in gold’s coffin. I think we can add a few more.”
The precious metal miners were also buried in the latest sell off, with GDX falling by over 12% at its lowest point this week. This was a true capitulation panic out of gold, with some 169 million shares in GDX changing hands this Monday, a volume that dwarfs turnover in previous periods of turmoil in the gold market.
As to how decimated the precious metal mining complex now is, consider the following excerpt from a July 21st update from Pater Tenebrarum from Acting Man, who commented that; “the HUI Index produced an RSI of slightly above 11 on its daily chart, after declining for a record 10th day in a row. This RSI reading is the lowest in the history of the index (the previous record low was produced in 1998 at about 16). Moreover, gold stocks have now broken every historical bear market record in the sector. Not only is this by now the biggest decline on record, the sector (as measured by the BGMI) is also trading at a record low relative to the gold price – undercutting the previous record low established in 1942 in the mini-crash following the Pearl Harbor attack.”
That is some sell off.
As for when the selling ends, no one can be 100% certain, and perhaps analysts like Bhar who I mentioned above will be correct, with severe price declines to come in a short period of time, and a bottoming out process closer to USD $800-900oz.
But a headline like “The Death of Gold” can’t help remind us of arguably the most famous Business Week headline of all time, released two months before I was born, back in August of 1979.
Titled “THE DEATH OF EQUITIES: How inflation is destroying the stock market” – it is the most frequently cited example of why investors should do the exact opposite of what the headlines in the financial media are telling them to do, for the very simple reason that this headline almost marked to the day the beginning of one of if not the greatest stock bull markets of all time.
Many investors have heard of this article and magazine cover, though we are certain not as many have read the article, nor picked up the fact that the same magazine specifically mentioned oil and gold, discussing the merits of indexing bonds to the two commodities. We have included the article as a link here, for those of you who wish to take a step back in time. We've also included a screen shot of the infamous cover.
The article is a truly extraordinary read, commenting on the disappointing performance of the Dow Jones over the preceding decade; nothing that “since 1968, according to a study by Salomon of Salomon Bros., stocks have appreciated by a disappointing compound annual rate of 3.1%, while the consumer price index has surged by 6.5%. By contrast, gold grew by an incredible 19.4%,”
The high inflation of the period, and gold’s outperformance throughout it was no doubt the reason why the concept of indexing bonds to gold would have held such appeal. By doing so, investors in fixed income products theoretically would have had their coupon and eventual principal repayments protected from the reduction in real purchasing such inflation causes. Of course the end of the 1970s would have been an unfortunate time to implement such a strategy, as gold was soon to peak, but that is what an era of high inflation leads too.
Today, some 35 years after this infamous article was released, the situation is completely reversed, with optimism towards financial markets at all time highs, and gold so universally loathed as an investment choice that the Wall Street Journal is calling it a ‘pet-rock’, whilst others call for the death of an asset that has survived for six millennia, protecting wealth along the way.
I’m fairly confident the headlines will be as wrong today as they were back in August of 1979, and have topped up my precious metal holdings accordingly. I might be a little early on that trade, but dollar cost averaging into the market will work over time, whilst the universal distaste towards the precious metal market that we see today can’t help but whet a contrarian’s appetite.
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Whatever, GOR is critical. Historic average is 12, right now it's in nosebleed territory above 21. Oil haters need to change their mind if they want their precious to rise.
Any financial advisor or commentator who can say with a straight face that you should not own any precious metals in your portfolio, considering the current economic environment, are not paying attention.
OT: Why were Chatanooga shooting victims already declared deceased a decade ago? https://www.youtube.com/watch?v=a63Xbu_4wT8
Because Bernank is a precog with wild ability to foresee future events and his abilities manifest in estranged Youtube encounters? He pressaged the coming nominal collapse of Gold to $10,000 per ounce as early as 2006 when he said, "Let there be moolah, baby"
+1 for the moniker
Ho Lee Fuk! False Fag?
You mean an investor like Warren Buffet? He specifically recommends NOT holding gold.
That's why he's sitting on his personal pile of $72 billion, and you're still just rubbing a couple gold coins together.
do a little research on why Buffets 130 millions of ounce hoard of $4 silver is thought to have became the SLV and get back to us.
http://goldandsilverblog.com/warren-buffetts-view-on-silver-0458/
Don't listen to what Granpaw says publicly, cause he is a lying SOS.
That is one corrupt SOB
Probably the same guy Barry is said to have fellatio performed on him by at Man's Country.
When I was born in the early 80's the average house price was £22k (now £180k), FTSE 100 by default was 1000 (now 6580), earnings averaged £7k per annum (now £25k), gold £225 (£700), silver £4.25 (£9.45). Which of those items looks overpriced?
I would compare the death of gold to crucifying Jesus in the hopes of destroying Christianity.
Good luck with that Wall street.
its happy hour..
lets see if they can rescue the Dow in the last hour of trading - again....
ps: nice read.
Gold and Silver have been money as long as money has existed (barter aside). What we are witnessing today with the fervent anti-PM MSM cum shot are the death pangs of the status quo. The world changes, it always has always will. And those holding power NEVER give it up freely without a fight. But in the end change happens. Go long, stack on.
Yes AL, and having been through the 1999, 2001 and 2008 lows, and listening to the rabid anti gold propaganda back then, this crap shouldn't surprise anyone around here.
Fact is, the USD/UST are the biggest bubbles on the planet right now. China is dumping them and buying gold. Most Americans are too stupid to realize where the real danger lies ahead.
The 'price' of gold and silver. It's laughable. Let's measure it in debt/gdp ratio's.
Very true Bay. Once I see Gold For Cash stores start springing up in the strip malls I'll consider selling. HA. Maybe not.
Welcome back, Al, long time no see.
I used to get so upset when the metals were raided!
I would rage and complain, until it hit me, JPM is just marking down the product I hold so dear and allowing me to stack at a discount.
Now I take comfort in realizing that this is the opportunity of a lifetime to keep adding to the only real liferaft in a time of conjured "money"
Who is dumping their phyzz?
GLD dumped over 25 tonnes this week.
I was told that GLD was only "paper"
Read the prospectus on GLD. It resembles Swiss cheese. Not to mention HSBC is the custodian of it, who happens to be one of the worst fraud ridden banks on the planet.
JPM dumped tonnes of GLD derivative paper
known known
Yep - and because it was all one's and zero's, didn't weigh anything at all!
Yep - and because it was all one's and zero's, didn't weigh anything at all!
I just ordered some platinum and palladium since I can get it quickly and I just might need to build a catalytic cracker for a teakettle refinery in the not too distant future....
check this out
US and Canadian Soldiers Breaching Door With Shootgunshttps://www.youtube.com/watch?v=Pmt8NyvcJgY
Nothing is more important to understand gold than reading and understanding monetary history. It is clear to me that the only event to end the gold manipulation is the massive repudiation of the collateral used to sell the gold futures position. Until 2013, it was only US Treasuries. Today, they use sov bonds from the Eurozone and JGBs. The other event, a run on physical can be, how can I put it.... physically prevented.
Now, the massive repudiation of collateral can only occur if the Fed screws up with their RRP operations/vs. QE, or if there are serious defaults outside the US. But with the reverse yankee wave coming from Europe, thanks to the ECB, and with miners hedging, this will be delayed.
Finally, no country like Russia or China, or any other with central planners will ever subject itself to the discipline of gold convertibility. The gold bugs who hope China will do something in this respect are delusional and plainly ignorant. The only time when gold was convertible, truly, was between 1609 and 1780, with the Bank of Amsterdam. That bank alone triggered the industrial revolution in England, a fact that any mainstream educational institution will simply ignore or vehemently deny. Amsterdam was ruled by merchants, and that Bank, although publicly sponsored, was a private institution. The only places where something like this could take place today are Israel or Singapore. But both venues are US protectorates. So, no chance at all. But there's always hope, which is why the price of a coin will always be positive, just like AMZN.
"Finally, no country like Russia or China, or any other with central planners will ever subject itself to the discipline of gold convertibility. The gold bugs who hope China will do something in this respect are delusional and plainly ignorant."
False premise.
Gold 'convertibility' isn't necessary for a Russia or a China to cause a tectonic shift in attitudes and confidence towards the $USD-as-world-hegemon. In fact, it is happening right now, in measured steps. The simple act of accumulating and being able to show to the world that your government has a substantial amount of physical gold holdings is enough to effect change. And that doesn't even take into account the rapid rate of deterioration in the foreign policy arena between the 3 largest, most powerful nations outlined here. Of course, any further major deterioration between the U.S. and China/Russia at this stage of the game, basically wipes the floor with standard Western gold markets, let alone the distinct possibility that China may, at some point of their choosing, decide to reveal their actual physical holdings. At that point, you need not trouble yourself with any concerns about the viability - or even, relevance, of the Crimex, the LBMA, GLD or anyone else.
I hope Vlad crushes the gold short sellers
Russia is part of the short selling...
nah BS
Wow, the kilo bars at kitco are cheap... like to have a few of those...
Mine have already left the vault. Order now.
Been watching gold and silver all day.
Like Xmas watching all red turn to green.
eric caught some spoofing that contributed to 24hr jump.
do not be fooled by the official PBOC gold reserve. it is an honest number. however, china spreads all their govement gold over several other goverment banks, goverment agencies and chinese people.
Don't forget, that a lot of China's "reserves" are still in the ground....
In the ground my ass. Try their population. SGE withdraws around 2k for several years let alone what they have bought in the last decade.
We'll get a capitulation event when the Masters of Manipulation decide they want one and then they'll move the pool right over you.
Where's the back up the truck comments?
Beep, beep, beep, beep....
hedgies just went net-short. all GLD holders need now is for gartman to come out after the close saying how he liquidated his long gold position (in yam terms) and the all clear will have been sounded.
I’m amazed, flummoxed, flabbergasted (pick your favorite) than anyone with two brain cells to rub together, places any credence on the China Gold Announcement. 1,600 tons, really? 600 of which were purchased in June. Right!!! A single entity purchases 600 tons of gold in one month and the price goes……down????
They lied about the state of their economy, they are lying, or at least being disingenuous, about the amount of gold they have. Perhaps the PRCCB only has 1,600 tons, but I guarantee you that together with their member banks, which they control, their true holdings are somewhere north of 10,000 tons. They are playing a masterful game of poker, holding their cards close to their vest, while the west is exposing its pair of deuces and busted straight draw.
They will only announce their true holdings when it’s in their best interest to do so. This announcement is only a shot-across-the-bow of the west letting them know that the renminbi is/will be a player in the world currency game.
Why would they annouce at all? Does any nation or bank "annouce" anything anymore? Not about gold. It's too barbarous.
Gold is a hedge against governments.
As the US gov't grows in cruelty, so will gold.
Just wait until pensions start discounting benefits.
It's not a hedge against inflation.
Death of Socialism?
Yes, then gold goes higher.
I never seem to be able to make anyone understand that when I sell PMs I am selling *physical*, part of my stack.
And that, no, I am not selling "in panic" or fear of the price going even lower. I wish I *had* sold it all back before the price plunged this low.
No, when I go sell part of my once impressive, now tiny stack, it is because there are bills that *must* be paid, *or else*, and selling part of my stack is the only way I have to pay them. I don't have anything else anymore, after paying for seven yrears of nursing home care. (I'm still paying for it.)
So, yes, I do care about the "phony paper price," from day to day, and so does the coin shop dude.
you will know it's time to buy again when the media has "Gold bubble crashed" headlines. Until then.
There is not enough space here to list the number of articles of said 'crash' that have already been published over the past (5) years...
Bullshit Zerohedge, "Tyler" or whatever the hell you call yourselves.
The Chinese government instructed their people to buy gold (and silver) when it was trading at around $1900 subsequent to which Chinese authorities colluded with western bankers to crash the gold price to roughly half that. Thus, the Chinese have irrevocably lost face for having screwed their own people. How much more disgustingly stupid can one get?
No matter what happens next, the Chinese have proven that they are firmly in the fiat money camp.
Fuck you, you moronic mongoloid Chinese bastards.
The Yuan will never be the next reserve currency while all that the Chinese enjoy doing is sucking western elite's dicks.
Bon appetit morons who think one can be a communist and a capitalist at the same time.
"Gross short positions in total, across all market participants, were also at a record 180,000 contracts, with net positioning at the lowest level since November 2014."
Just wondering...Who bought all these contracts?... One cannot sell (go short) a contract unless someone else buys (goes long)...