fought a stalwart battle above $1,700 and having seen over $1,900 this year,
gold has not done as so many analysts have believed it would and risen
through $2,000. Instead, here we’re headed down towards $1,500 to who
knows where? The stress in the financial markets has not
stimulated safe-haven gold buying but has instead weakened the euro and
indirectly helped drag gold lower. Prices have fallen to a point where
investors with longstanding positions are liquidating some of their holdings
to secure profits and momentum-driven traders are selling heavily. At the
same time stresses continue to be seen in the European interbank lending
market as USD funding has become even more expensive as the year closes.
European Central Bank’s USD tenders have done little to alleviate
stresses in the USD funding market as was expected. Accordingly, European
banks will continue the practice of acquiring USD funding through the foreign
exchange forward markets, a process that is contributing to its strength. The
aim of last week’s European Union summit –that Eurozone governments agree to strict a fiscal pact in
return for the E.C.B. buying government bonds—has not materialized.
the E.C.B. did agree to lend money on easier conditions to European banks,
but this is not as free a condition as was thought, as the load remains on
politician’s shoulders not on the E.C.B.; however, the ability of
bankers to take low interest money from the E.C.B. and invest in higher
yielding Eurozone government bonds is as we have
said before, a form of “back door” Quantitative Easing. In time,
this will be very bullish for gold as it was when the U.S. followed the Q.E.
Gold has so many incontestable positive
mine supply growth.
tiny sales from gold Exchange Traded Funds, confirming long-term holders are
· Jewelry demand
· A drop
in scrap sales.
world political ineptitude on matters of finance.
· A pause
in emerging market demand [primarily because a weak Rupee has lifted gold
price in India to record highs [They are now back to ‘buyable’
book squaring and sales to secure profits.
positions to lower margin costs as the price falls.
stop triggering of sales as well as sales triggered
by the breakdown of support levels.
the difference - On the bullish side these are solid long-term reasons why
the gold price should rise. On the bear side, the reasons are short-term and,
we feel, engineered reasons to sell gold.
Why is the price
falling after London is closed and before Asia opens?
Is this forcing the
One of the most suspicious facets of
this last fall in the gold price is matched by the previous heavy fall from
$1,900. If an investor wishes to sell his position, he will do whatever is
necessary to achieve the highest price he can for his holdings. In the gold
market, this is best achieved by selling in the market when he can sell the
most gold at a price that is achieved on his entire sale at one time.
Best and Worst Ways to
Sell Large Amounts of Gold
This is why the two daily Fixing
sessions were set up in London. The AM Fix usually achieves the highest
price, incorporating as it does the emerging –particularly the Indian
and Chinese markets—world. In the afternoon the Fix is usually set
lower because the gold price usually falls in the U.S. After the afternoon
Fix the gold price is usually at its daily weakest in a relatively
‘thin’ market. So sales after the afternoon Fix are almost
guaranteed to achieve the lowest price and have the most detrimental impact
on the gold price. And this is particularly so if the sales are heavy in a
‘thin market. Certainly, unless immediate demand responds to this in
Asia’s day or in London’s morning to the extent that they chase
prices, the gold price will remain at the lower levels.
But the sales of gold –both on the
fall from $1,900 and from $1,700—took place after both Fixes were done.
Why on earth would a seller want to sell when he would achieve only the worst
price? Why sell persistently to make the gold price fall further? That is
unless that is precisely what he wanted to achieve? With lease rates in
negative territory it appears that heavy lending has taken place encouraging
just such falls. Is the motive the same as it was when central banks sold
gold in the last fifteen years of the last century? It could be so! Their
motive then was to ensure the dollar’s dominance.
Can Central Banks
Increase Their Leasings?
The Central Bank Gold Agreements since
the turn of the century have been invisibly in support of the establishment
of the euro. Now such establishment needs repeating for sure. But outright
sales from European banks are unlikely.
In the first two Central Bank Gold
Agreements clause four stated:
The signatories to this agreement have
agreed not to expand their gold leasing’s and
their use of gold futures and options over this period.
However, the Third Agreement saw a
change from this. It made no similar commitment! Although central
bank activity in these fields has been very limited in recent years we have
to ask, “Are we seeing it now?”
Bank Buying and
Central banks are not price-chasers.
More than that, they are almost unconcerned at the price, but are sharply
focused on the volume offered to them. When they buy, they’re aware
that it’s held by them for a time when their own currency may be
unacceptable internationally. Therefore, they want quantity.
We’re told that the dollar funding
problems remain heavy, forcing banks to do what they can to raise loans, even
if it means selling gold. Previously, we too, were of the opinion that
commercial banks were the likely sellers of gold to raise loans and to
facilitate lower interest rates. But there are certain features of the fall
in the gold price that discredits this theory now. Commercial banks
don’t as a rule hold large amounts of gold on their balance sheets, so
where could they get gold from to sell?
A glance back to last century shows a
time when it was extremely profitable to borrow gold from central banks, sell
if forward to achieve a market price plus the interest over the period that
they could sell forward for. The interest is known as the ‘Contango’, which added to the price achieved,
fetched far more than the gold price alone. But today the people who
‘hedged’ back then, were gold miners financing future production.
Today, few gold miners would do that again. Why not? Because they do not have
easily constructed gold project to finance. Secondly, when the gold price
turned back to the upside, these hedged positions had to be unwound at a
But it is the commercial banks that are
doing so this time you may reason. Well, they don’t have any gold with
which to re-supply the bullion banks. They would have to go back to the
market to re-buy the gold again, and if the gold price had turned they might
be badly burned with such a gamble. Unless!
If they knew they could engineer a big fall in the gold price, it would be
worth a short-term gamble to be covered quickly so as not to be burned.
Essentially this would be shorting the market. With lease rates in negative
territory now it seems central banks are willing to make such loans and they
too would need to be happy that the counterparty was able to return the gold
safely back to them. Otherwise how could they face a public with a tale they
had lent gold and the borrower was not able to repay or had gone bust? Such
an event would prove scandalous to a central banker and badly damage
confidence in the bank!
We, mere mortals will never be made
party to such information any way. The conclusion that appears most
reasonable is that such august institutions would ensure that the gold was
returnable and in the absence of a gold miner supplying them from future
production, would have to insist that the exercise was very short-term!
ETF Sales of Gold
the beginning of December the SPDR, States based gold Exchange Traded Fund
has sold only 2.5 tonnes of gold. This amount is insufficient to force the
gold price down over a hundred and more dollars in a few days. So we cannot
accept this as a source of gold sales. Some say they were the lenders. The
same restraints would apply to them as apply to the commercial banks. We feel
that this would rule them out too. The same would apply to investors in those
Gold Price Euro
Some analysts have now said that there
is a link between the euro and the gold price. We struggle to find the
smallest common denominator for that story. Oh, some may say that the gold
price rose because of fears for the existence of the euro. Such speculation was
not present when gold was at $1,900! As for fears about the euro now
dissipating –nothing could be further from the truth. Fears remain
heightened and the fear of a major bank crisis has grown even more as they
remain so stressed.