Nomura Explains Why Gold Went Down, And Why It Is Going Back Up

Tyler Durden's picture

Tired of all the trite meaningless propaganda from Economic PhDs who crawl out of the woodwork every time there is a downtick in gold, proclaiming in big bold letters that the Gold "bubble" has burst, only to crawl right back in when gold soars $100/oz in the days following their latest terminally wrong proclamation? Or, alterantively, wondering what will happen to gold from this point on? Then the following report from Nomura is for you. As Saeed Amen analyzes: "In this article we explain why the price of gold has fallen in recent weeks. Notably, price action during Asian hours has become very bearish, which had not been the case in previous unwinds earlier in the year. In addition, it is likely that losses in risky assets such as equities helped precipitate unwinding of very heavily extended long gold positions. However, the key reasons for being bullish gold remain; namely, a very low interest rate environment and the potential for long-term demand from Asia. Also, the potential for gold’s status as a safe-haven hedge to tail risks arising from various uncertainties due to the European debt crisis is likely to be enhanced, especially now that short-term speculative positioning is relatively light. Also on a short-term basis, we have begun to see some reversal in gold  back upwards during Asian hours, after the unwind." Overall, informative but nothing new to regular readers: gold liquidations on market plunge (confirming ironically that gold is now among the most liquid types of investments in the market) as had been predicted months ago, and the same long-term fundamentals for the metal once the current stock downturn shakes out all the weak hands.

Full note:

Why Did Gold Go Down:


In recent weeks the gold price has fallen significantly from around $1900 to $1535 (intraday). Gold is now trading near our Q3 target of $1650. The size of the move was far more significant compared to other recent unwinds, like those in May or August. One of the key factors for our long-term bullish view on gold is Asian demand. As discussed in FX Insights – Gold, gold, 6 July 2011, the majority of end-user demand for gold is from Asia. From an Asian valuation perspective, gold is also relatively cheap (

Gold has not been supported during Asian hours

One way to proxy Asian demand for gold is to look at how gold performs during Asian trade. Over the past few years, gold has generally appreciated during Asian hours, reflecting strong demand for the metal. However, recent weeks have shown weakness in Asian hours (Figure 1). On previous occasions when gold traded poorly, such as in May and August, it remained relatively robust during Asian hours, with any sell-off tending to come in London and New York hours, suggesting that Asian investors were supporting an unwind of Western investors’ long gold positions.

This contrasts with the recent fall, which has been noticeable across multiple time zones. In the very short term, we believe a reversal would need to be led by appreciation in Asia. Although a few data points do not constitute a trend, on Tuesday and Thursday gold rose by 2%, its largest moves higher during Asian hours since October 2008 and perhaps a signal that it could be turning back up.

Gold has declined more than would be suggested by moves in rates

The last FOMC meeting did not expand the Fed’s balance sheet (i.e. QE3), which would have been bullish for gold (see Give Gold Some Credit, 19 August 2011 for some discussion about the relationship between QE and gold). However, the Fed has committed to keeping rates low until mid-2013, as well as embarking on Operation Twist, which should be gold-supportive. Indeed, in Figure 2 we plot inverted real rates against gold and find that the price action has been detached in recent weeks. This suggests that it is difficult to attribute the fall in gold purely to the lack of QE3.

Gold sold off at the same time as equities

Although gold can trade like a tail-risk hedge, it often trades like a risky asset. This has been evident in recent weeks where we have seen a strong positive correlation between gold and the S&P500 (Figure 3), which we use as a proxy for risky assets. The rationale is that heavy losses in risky assets forces investors to unwind other positions to free up cash. As a liquid asset and also with heavily extended net long speculative positioning heading into this episode, gold has suffered (Figure 4).

Speculative positioning is lighter in gold – back to tail-risk hedge?

However, with positioning now at relatively low levels, it is likely that gold will trade more in line with the fundamental factors we have discussed, namely low real rates and the potential for continued Asian demand, which are broadly positive. The lack of positioning could also enhance gold’s status as a tail-risk hedge in the continued uncertainty around the European debt situation.

Tail risks in Europe

Developments in Europe have become the main market driver recently. In recent publications we have analysed both our base case, which involves no Greek default and the tail risk of a Greek default (see EURUSD: Our Central Case, 5 September 2011 and EUR/USD – The Greek tail risk, 7 September 2011). In short, we think that both our central case and the tail-risk scenario are likely to be negative for risk sentiment.

Even if Greece continues to meet its obligations and avoids a disorderly outcome, there are serious doubts regarding the EFSF’s capacity to intervene credibly in the sovereign debt markets of Italy and Spain once it takes over this role from the ECB without significant leverage (for a discussion on how this may be achieved see EFSF 2.0, 3.0 and beyond, 30 September 2011). Despite  the barrage of policymaker meetings next week and the fact that the various options regarding EFSF leverage are on the agenda, we do not expect any decisions to be made any time soon (see also G10 FX Insights - The Missing Bazooka, 30 September 2011). Until we have better visibility on this issue, however, we believe markets are likely to exert renewed pressure on Italy and Spain as we approach the takeover date. Furthermore, the Greek saga continues with Troika inspectors’ delayed return to Athens causing further delay in the disbursement of the sixth instalment, EFSF 2.0 ratification pending in many EMU countries and various headlines regarding the possibility of a change in the terms of the 21 July agreement.

The bottom line is that both our central case and Greek tail risk are likely to cause a new round of risk aversion in global markets in the next few weeks and exert further downside pressure on EUR. We have been trading EUR/USD from the short side since 25 August (see Sell EUR/USD spot) and have recently restructured our shorts (see Positioning for the euro break, 22 September 2011).

Bar the unlikely event of a major breakthrough by European policymakers in the next few weeks, we expect gold to benefit from a new bout of risk aversion as the market re-assesses yet again the chances of a new systemic crisis. This point is further enhanced by noting that the correlation between gold and EUR/USD has turned negative recently. A similar, albeit greater, correlation shift occurred during the first phase of the Greece crisis in May 2010 (Figure 3). This lends further support to the idea that gold tends to function as a safe-haven hedge in cases of European risk events that have a systemic impact.


We have seen that gold’s recent fall has been accompanied by heavy deprecation in Asian hours. This contrasts with relatively robust Asian price action during earlier periods of gold weakness in May and August. We think that a reversal of this trend back to gold appreciation in Asian hours is the key to a short term reversal and we have begun to see this in recent days. We also find that the correlation between risky assets and gold has been higher than usual in recent weeks. Hence, we suggest that heavily extended speculative net long gold positions have unwound to free up cash for other losses in risky assets, like equities. With short-term speculative positioning net longs at relatively low levels, it is likely that fundamentals, as opposed to positioning, are likely to drive the price of gold again.

We continue to view long-term fundamentals, such as low real rates and the relative cheapness of gold when viewed from an Asian perspective, as bullish for gold. At the same time, gold’s attractiveness as a tail-risk hedge against the continued uncertainty in Europe is likely to be another factor that should support the price of gold in the short term.

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HoofHearted's picture

So, does it need to be said?

Gold, bitchez.

GetZeeGold's picture


Ok.....DAMMIT....can we just pick a direction and stick with it!


tmosley's picture

Ok, volatility will rise.  That's about the only direction you can be assured of in paper markets during a fiat currency collapse accompanied by mass fraud.

GetZeeGold's picture when does the mass fraud hit......cause I sure want to be ready for that.


Mister Ponzi's picture

Must be true when the name of the guy who wrote the article is "Amen"...

FoieGras's picture

I find it hilarious how 'experts' love to explain market moves with the benefit of hindsight. This is such a futile exercise.

Who cares *WHY* it dropped? Does it matter? Gold's in a bull market as far as the technicals are concerned. I am long a couple contracts and I got my stop around 1500, that's all I need to know.

GetZeeGold's picture


That's why we all watch CNBC.......they nail it everytime.



Mad Cow's picture

Yeah, history sucks, who needs it! /sarc

no2foreclosures's picture

Try gold has not been supported during European Central Banksters hours.

Trust me, the Asians aren't selling their gold.

Oh regional Indian's picture

I think the point is the lack of buying support in Asia these past couple of weeks. Same probably for silver too.


no2foreclosures's picture

Prices don't just go down because of a lack of buying, it takes active short selling, probably naked short selling, to make make gold prices go down $50-$100.  This article is a shitty cover story for the Central Bansters manipulating gold prices.

caconhma's picture

Ben and his fellows need to bring commodities and PM prices down (even for a short-time) to claim a deflationary threat and to start the next money printing spree.

This is no different from what they have done in 2008.


cynicalskeptic's picture

Asia saw a chance to let the price drop - and buy on sale.    They're not dumb.  Whiel the US is worrying about paper prices you can bet Aisa bought physical on the drop.  I wonder where the gold coming out of GLD went?   Presuming any real gold DIDget sold out of GLD........

hourglass86's picture

Nouriel Phucking Douchebag Roubini always tweets shit when theres a dip in gold. 

GetZeeGold's picture


Does he have a Nobel prize? I'm losing track of all the geniuses.



caconhma's picture

Does he have a Nobel prize? no, he is not Jewish.

akak's picture

True, Roubini is a fraud of an economist, and a shameless defender of the central bank-controlled financial and monetary status quo --- but he did stay at a Holiday Inn last night.

Besides, he has had the ultimate honor: having a breakfast cereal created in his image.
You know the one I mean ---- "Count Chocula".
Which is, perhaps unsurprisingly, full of sugar and short on fiber and any real nutrition.
You can find it on grocer's shelf, right next to the boxes of "Denninger Flake(s)" and "Special K(eynes) with Dead Theories".

eigenvalue's picture

But if Greece defaulted, gold and silver could be taken down again as in 2008.

agent default's picture

Not necessarily, in 2008 we had a debt crisis not a currency crisis.  People needed liquidity and got it from wherever they could.

 A Greek default on the other hand, however well managed (which will not be) will create a huge confidence crisis in the Euro and the EU banking system, sending aftershocks throughout the world.  The survival of the Eurozone under such a situation looks increasingly unlikely.  People will probably flock to PMs as they are shocked by the risks behind central bank controlled currencies.  Not  the big institutional investors mind you, I am talking about ordinary people who have never held gold or silver before.  The demand for physical PMs will come from the bottom.  The exchange traded PM backed securities are a different story, and I think that there will be some sort of a separation between the two markets.  It will just be another floor of the banking/financial system coming down hard.

eigenvalue's picture

My guess is that gold and silver would be hammered again in the case a Greek default and turmoils in Europe. But when the European debt crisis ends and people start to focus on the US debt crisis, then gold and silver would soar.

Smiddywesson's picture

Yes.  Any event of such magnitude that it is guaranteed to be good for gold will draw the ire of the Fed, the ECB, and apparently, the Chinese central bank.  That means more manipulation and lower prices UNLESS you are willing to bet your money that this one event is of such magnitude that it breaks their ability to manipulate prices lower.  That's one Hell of a bet. 

I wouldn't take that bet, so I will step aside and see if Greece is too big for the manipulators.  Why?  Because if the manipulation machine breaks, there IS NO ceiling for PM prices.  I am not going to miss that move if I sit on the sidelines for a few days.

They can only cheat you if you are greedy.  Don't try to catch the whole wave when you are hunting a tsunami.

Pladizow's picture

For the same reason as gold is NOT in a bubble, is why it will be slaughtered in the event of a Greek default; i.e., not enough people/institutions own it.

In a panic the money will not immediately flow to PM's, but to the unworthy $.

Familiarity breeds complacency and people will go where they have always gone.

Gold is not yet a focal point.

When the dust has settled in Europe and the US once again becomes the center ring, then gold will enter phase 3.

glokk26L's picture

If it gets hammered down, that means its time to buy more.

Though there's a limit to buying metals that aren't lead.

I find that a good move is 2 bricks of .22 lr per week with assorted boxes of other calibers.

Meijer has .357 JSP 158 gr in my neck of the woods.... hope to try some in the Redhawk.  Should be a screamer!

GeneMarchbanks's picture

Greece defaulted a while ago, arithmetically speaking, so if you are still looking to the deranged Eurocrats for direction, may I suggest investing in a clue stick and smacking yourself with it.

GoldBricker's picture

I should hope that particular contingency would be priced in by now.

That said, there is always room for a short-term deflationary downdraft as gold longs (especially the paper kind) close their positions to free up funds to raise cash. I suspect that the game won't be over until physical decouples from paper (i.e., has its price quoted separately).

FeralSerf's picture

It already has its price quoted separately in SGOL vs GLD.  There's about $30 difference in the price now.

Quinvarius's picture

First of all, look at the chart of gold vs the S&P in 2008.  Gold was already at all time highs when the S&P was at 666.  So good luck trying to time a dip based on your theory.

Second, we are talking about the death of paper currency this time around.  I am not fooled by a bunch of margin raises and clown action manipulation to move paper gold down during key bullish gold events, even while physical demand goes up.

One of the things that sealed German fate in Weimar was their ignorant attempts to sell gold into the market to stop their worthless paper from dumping.  So when the time came to put a stop to the currency death spiral, they had no gold left to create a new currency.  They ended up making a land based currency to save themselves, but that eventually died too because no foreigner could collect on the land.  Gold is the only way to build or save a currency.  Hopefully the central bankers are not so stupid that they are unable to learn from 10's of examples of currency deaths in the past hundred years.  Either they push gold up to a price where we can back our currency, as happened to the US in 1980, or they go to a gold standard.  If they keep pretending they can base paper money on unpayable debt and possibly give up their gold, there is no bottom in paper money. 

DrunkenMonkey's picture

Or 'they' raise interest rates to entice people into bonds and cash deposit accounts, no ?

Quinvarius's picture

Honestly, I can not see one example of where that ever worked.  People like to say Volcker did it.  But the dollar continued to plunge no matter what he did until it was 100% backed by the US gold supply.  IMO, the Volcker rate raises being a factor are a Keynesian central banker myth.  All Volcker did was hose the economy up.

AmCockerSpaniel's picture

He said "could", not would. So he said nothing. This "may" be a last post??

cynicalskeptic's picture

Didn't one of the Gulf states just trade Greece dollars for an option on their gold?,,,,,,,,,     Wouldn't that lock up their Gold so even in case of a default that wouldn't hit the open maarket?  Paper games can be played but when it comes to physical...  no fundamental changes....

DormRoom's picture

gold @ 1100 by New Years.


when correlation = 1, after further drops in all asset classes, gold & silver will collapse, like in '08.

eigenvalue's picture

History doesn't repeat itself although it rhymes. I don't think gold can reach $1100 again.

GeneMarchbanks's picture

That's fine. If no one buys the dip @ 1400 1300 1200(which I highly doubt) I'll step in @ 1100 enough to sink a cruise ship. Here's a question: in that scenario, where are the European banks and BAC & MS?

GoldBricker's picture

Maybe they've got put options on each other that they can cash out.

GoldBricker's picture

So duh, sell it short now and watch the money roll in. You won't even need to finish college. It's obvious you're already way too smart to need that.

Quinvarius's picture

Gold is already cheaper now than it was in 2008.  It is $550 an ounce in 2007-2008 money and $51 in 1980 money. 

Jendrzejczyk's picture

 Is there a link to that data or how it was calculated? Not trolling, just interested.

Michelle's picture

Based on that logic, which is what the inflationists will tell you, imagine how cheap gold was in 2001 at $250? What about silver at $3? Was the money supply not laarger then, too?

My point is that Gold and Silver don't trade on fundamentals otherwise their prices would almost alway be on an upward trajectory. This asset class is in a bubble and will pop like everything else. This time isn't different either.

tmosley's picture

Deflationsists don't understand that there can be bubbles in fiat currencies too, not to mention bonds.

This is why they have always, and will always continue to lose absolutely everything.

Snidley Whipsnae's picture

The world's biggest bubble now is in US Treasuries.

We continue to hear that US Ts are the worlds 'deepest and most liquid market'...but, no one, with the exception of a few savvy bond fund managers, stops to consider why this is.

US Ts are created with a key stroke on a computer.

US Ts are just another god damned piece of paper.

Anyone that prefers to hold computer generated electronic pieces of paper over physical gold is a fucking moron.

When the dust settles there will be only PMs left standing as true stores of value... Well, there will be some precious stones, art works, and productive ag land if one can afford the taxes (read about Roman farmers)...  

Smiddywesson's picture

All paper is a house of cards dependent upon the system.  When the system goes, it all collapses, revealing PMs as the only surviving liquid assets.  They were the only real liquid assets all along, it's just the house of cards concealed that fact.

doomz78's picture

If there is a collapse i would think 1400 is as low as she'll go.  Then the bull market will resume once they print the money to "save" us from the banking crisis. 

Quinvarius's picture

It takes 2 to ten years to translate a spike in currency supply to inflation based on my observations of other inflations.  I'd say we are still looking forwards to the TARP and multi trillion loan effect from the 2008 crisis.  Then after that we will still have the QE2 effect and now thr EFSF effect.  We are probably just now getting the Bush inflation effects.  When it really starts rolling, no layman will understand it because the cause will be so far behind us.

cynicalskeptic's picture

We're still in the low velocity induced deflation.  People are scared, keeping money in cash or T-Bills so it's not moving.  When people see how fast that money is losing purchasing power, THEN you see velocity take off as people look to swap their paper money for somethjing with tangible value.  As inflation increases, velocity increases since nobody wants to hold depreciating cash.... buying power drops mopre, people spend it faster, value drops more... vicious cycle   You saw it in Weimar, and places like Argentina and Brazil.  You spent money as fast as you got it because it would buy less tomorrow.  You bought anything you needed as soon as you got cash and spent any left over money on ANYTHING with tangible value.  Unfortunately your buying power doesn't keep up with the increase in prices so you get to the point where you don't have any 'extra' cash - and indeed don't have enough  to buy necessities.  

Better hope inflation doesn't hit the lift off ppoint to hyperinflation.  Things get nasty.

FeralSerf's picture

The Proles can't spend their cash, which is denominated in bankster ATM units rather than Ben Franklins now, if the banks fail or refuse to allow the transactions.  It really is different this time.  This time the people don't have any physical currency to speak of.  A shortage of physical currency will (and is) causing it to be hoarded.

There's a lot of cash outside the country, but DHS and their security is not going to allow the currency to be repatriated so it would be able to actually buy stuff like gold, farm land, and bullets.

DormRoom's picture

gold @ 1100 by New Years.


when correlation = 1, after further drops in all asset classes, gold & silver will collapse, like in '08.