Special Analysis
by Franco Seguso, April 2013

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GOLD under attack

Within just few days, investors who have been seeking a speculative monetary alternative (Bitcoins) or the traditional sanctuary of real money (gold) were crushed by a sudden spike of downward volatility. Speculation and safety have both been challenging for portfolio managers, in a sign of times to come, while traditional securities markets continue to show a deep disconnect from reality and fundamentals.

Gold correction from its high of September 2011 at over $1900 has been accelerating since last October when QE-3 was announced and the FED embarked on an $85bn monthly balance sheet expansion. Since then the Bank of England has expanded its own monetization program while the Bank of Japan just announced the equivalent of $1 trillion in new monetization and the doubling of its monetary basis, resulting in a dramatic increase in the JGB market volatility (the single largest debt market in the world).

In between, the Eurozone adopted its first bail-in in Cyprus where uninsured deposits have been grabbed to the tune of up to 80% and capital controls have been adopted, bringing the potential of a disorderly Euro break-up all the more possible as staggering social and financial costs outweigh dwindling economic benefits. Each of these instances was unquestionably gold positive after 18 months of consolidation, yet gold broke down dramatically in what appears a coordinated attack across the major bullion markets (London, NY and Japan). Another apparent disconnect is the paper-based nature of the gold downdraft, driven by leveraged gold futures rather than by physical sales.

This monetary disconnect is all the more surprising that geopolitical tensions between China and Japan on one hand, the Koreas on the other, a political anti-Euro gridlock in Italy and a devastating political scandal in France were all conspiring in favor of the safety of gold rather than towards the structural risks embedded in the Euro or in the debasing currencies of countries openly targeting devaluation. Not to mention the recent breaking out of currency wars! As Grant Williams put it this week, ‘no matter which way you sliced and diced things, gold’s star should be in the ascendancy in recent weeks, not in a rout’.

Central bank conspiracy or speculative attack?

Friday, an estimated 500 tons of gold (20% of global annual production) were furiously dumped in paper form on the gold future market. This amounts to a staggering 25 billion dollar in a single day, pushing the price of gold down 4% by the end of the day ($1 billion devaluation): how many out there have such kind of firepower (in case of a naked short) or can absorb such kind of losses (in case of a forced seller)?

Former FED’s Chairman Volker is on record saying that one of his regrets in crushing inflation in the early 80s was having left gold prices to their own devices (read markets), resulting in a price signal that not all was well in the realm of inflation. President Roosevelt was manipulating the price of gold (to devalue the dollar) on a daily basis after the 1933 confiscation. Could it be any different this time?

After systematically rigging the interest yield curve, the dollar, the bond and equity markets, there is little doubt that the FED would not hesitate to rig the gold market if such was its interest. But this time the FED fingerprints do not seem to be all over the place. So we should rather turn to speculative hedge funds and the Machiavelli of finance to find a likely explanation.

Goldman Sachs, a major bullion prime dealer and a FED insider-cum-stakeholder, timely suggested last week shorting gold with a low $1,200 downside target. GS recommendation was just months after recommending going long for a $2,000 target, so such a turnaround is all the more suspicious that gold prices corrected orderly all along.

The attack managed to break widely-followed technical levels and to trigger stop-losses that snowballed into further panic selling. Benefitting this coordinated and deep-pocketed attack are the holders of very large short speculative positions: Wall Street bank(st)ers, bullion prime dealers and large hedge funds, the only other actors apart from central banks with such money power.

The timing of the attack follows the BOJ surprise to go full QE and double the Yen monetary base, risking sending gold prices substantially higher and inflicting increasing losses on those short speculative positions as they were forced to cover. Gold came to a striking distance of $ 1,600 following that announcement.

The trigger for the attack was the purportedly ‘hawkish’ FOMC-FED minutes leaked ‘by error’ to selected banksters recipients last week, mentioning an end to QE at an earlier stage as the US economy gradually recovers. This has been a constant FED strategy of paying lip service to exit strategies (never executed) to anchor inflation expectations, all the while pushing even more in unchartered QE territory.

With the timing and trigger in place, the last requirement was size and as we know, they came down big, very big!

Now, with all major central banks in full QE mode, with the BOJ declaration of war against deflation, with unsustainable debts accumulating on equity-depleted balance sheets, with negative interest rates across the world, with lack of genuine economic growth, the case for physical gold as a hedge against all these monetary experiments against debt deflation has never been more compelling.

Not only we strongly recommend holding on your physical positions, but also to accumulate more physical gold at current levels ($1,350) funded through a basket of EUR, JPY and GBP. The physical gold market will eventually enter a secular bear market when monetary conditions normalize, debts ratios mean-revert to sustainable levels, real interest rates become positive and genuine economic growth replace debt-driven asset growth. We are very far from each of these signposts, and believe that the speculative attack under way is an opportunity to add exposure to one of the few remaining real store of value out there.

 

Franco
Bangkok, April 16, 2013