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I am very disappointed by, but not surprised at, the
latest transfer of weath to the bankers from everyone
else. The most recent gold bear raid has vastly enriched the bullion bankers,
once again, at the expense of everyone trying to protect their wealth from
global central bank money printing.
The central plank of Bernanke's magic recovery plan has
been to get everybody back borrowing, spending, and "investing" in
stocks, bonds, and other financial assets. But not equally so - he has been
instrumental in distorting the landscape towards risk assets and away
from safe harbors.
That's why a 2- year loan to the US government will
only net you 0.22%, a rate that is far below even the official rate of
inflation. In other words, loan the US government $10,000,000 and you will
receive just $22,000 per year for your efforts and lose wealth in the process
because inflation reduced the value of your $10,000,000 by $130,000 per year.
After the two years is up, you are up $44k but out $260k for net loss of
$216,000.
That wealth, or purchasing power, did not just vanish:
it was taken by the process of inflation and transferred to someone else. But
to whom did it go? There's no easy answer for that, but the basic answer is
that it went to those closest to the printing press. It went to the government
itself which spent your $10,000,000 loan the instant you made it, and it went
to the financiers that play the leveraged game of money who happen to be
closest to the Fed's printing press.
This explains, almost completely, why the gap between
the rich and everyone else is widening so rapidly, and why financiers now
populate the top of every Forbes 400 list. There is no mystery, just a
process of wealth transfer of magnificent and historic proportions; one that
has been repeated dozens of times throughout history.
This Gold Slam Was By and For the Bullion Banks
A while back I noted to Adam that the gold slams that
were first detected back in January were among the weakest I'd ever seen. Back
then I was seeing the usual pattern of late night, thin-market futures
dumping which I had seen before in 2008 and 2011, two other periods when
precious metals were slammed hard.
The process is simple enough to understand; if you want
to move the price down for any asset, your best results will happen in a thin
market when there's not a lot of participation so whatever volume you supply
has a chance of wiping out whatever bids are sitting on the books. It is in
those dark hours that the market makers just dump, preferably as fast as
possible.
This is exactly what I saw repeatedly leading up to
Friday's epic dump-fest. The mainstream media (MSM), for its part, fully
supports these practices by failing to even note them, and the CFTC has never
once commented on the practice, and we all know that central banks support a
well contained precious metals (PM) price because they are actively trying to
build confidence in their fiat money, and rising PM prices serve to reduce
confidence.
Here's a perfect example of the MSM in action, courtesy
of the Financial Times:
Gold
tumbles to two-year low
"There is no other way to put gold's recent sell-off:
nasty," said Joni Teves, precious metals
strategist at UBS in London, adding that gold would have to work to "rebuild
trust" among investors.
Tom Kendall, precious metals analyst at Credit Suisse
said "Once again gold investors are being reminded that the metal is
not a very effective hedge against broad-based risk-off moves in the
commodity markets."
There are two things to note in these snippets. The
first is that the main ideas being promoted about gold are that it is no
longer to be trusted, and that somehow the recent move is a result of
"risk off" decisions meaning, conversely, that there is increased
trust in the larger financial markets that 'investors' are rotating towards.
Note that these ideas are exactly the sort of messages that central bankers
quite desperately want to have conveyed.
The second observation is even more interesting; namely
that the only people quoted work directly for the largest bullion banks in
the world. These are the very same outfits that stood to gain enormously if
precious metals dropped in price. Of course they are thrilled with the
recent sell off. They made billions.
In February Credit Suisse 'predicted' the gold
market had peaked, SocGen said the end of the gold
era was upon us, and recently Goldman Sachs told everyone to short the metal.
While that's somewhat interesting, you should first
know that the largest bullion banks had amassed huge short positions in
precious metals by January.
The CFTC rather coyly refers to the bullion banks as
simply 'large traders' but everyone knows that these are the bullion banks.
What we are seeing in that chart is that out of a range of commodities the
precious metals were the most heavily shorted, by far.
So the timeline here is easy to follow - the bullion
banks:
- Amass a huge short position early in the game
- Begin telling everyone to go short (wink, wink) to
get things moving along in the right direction by sowing doubt in the
minds of the longs
- Begin testing the late night markets for depth by
initiating mini raids (that also serve to let experienced traders know
that there's an elephant or two in the room)
- Wait for the right moment and then open the
floodgates to dump such an overwhelming amount of paper gold and silver
into the market that lower prices are the only possible result.
- Close their positions for massive gains and then
act as if they had made a really precient
market call
- Await their big bonus checks and wash, rinse,
repeat at a later date
While I am almost 100% certain that any decent
investigation by the CFTC would reveal that market manipulating 'dumping' was
happening, I am equally certain that no such investigation will occur. That's
because the point of such a maneuver by the bullion banks is designed to
transfer as much wealth from 'out there' and towards the center and the CFTC
is there to protect the center's 'right' to do exactly that.
This all began on Friday April 12th, and one of the
better summaries is provided by Ross Norman of Sharps Pixley,
a London Bullion brokerage:
The gold futures markets opened in New York on Friday
12th April to a monumental 3.4 million ounces (100 tonnes)
of gold selling of the June futures contract (see below) in what proved to be
only an opening shot. The selling took gold to the technically very important
level of $1540 which was not only the low of 2012,
it was also seen by many as the level which confirmed the ongoing bull run
which dates back to 2000. In many traders minds it
stood as a formidable support level... the line in the sand.
Two hours later the initial selling,
rumored to have been routed through Merrill Lynch's floor team, by a rather
more significant blast when the floor was hit by a further 10 million ounces
of selling (300 tonnes) over the following 30
minutes of trading. This was clearly not a case of disappointed longs leaving
the market - it had the hallmarks of a concerted 'short sale', which by
driving prices sharply lower in a display of 'shock & awe' - would seek
to gain further momentum by prompting others to also sell as their positions
as they hit their maximum acceptable losses or so-called 'stopped-out' in
market parlance - probably hidden the unimpeachable (?) $1540 level.
The selling was timed for optimal impact with New York
at its most liquid, while key overseas gold markets including London were open
and able feel the impact. The estimated 400 tonne
of gold futures selling in total equates to 15% of annual gold mine
production - too much for the market to readily absorb, especially with
sentiment weak following gold's non performance in
the wake of Japanese QE, a nuclear threat from North Korea and weakening US
economic data. The assault to the short side was essentially saying "you
are long... and wrong".
 
( Source
- originally found at ZH)
The areas circled represent the largest 'dumps' of paper
gold contracts that I have ever seen. To reiterate Ross's comments, there is
no possible way to explain those except as a concerted effort to drive down
the price.
To put this in context, if instead of gold this were
corn we were talking about, 128,000,000 tonnes of
corn would have been sold during a similar 3 hour window, as that amount
represents 15% of the world's yearly harvest. And what would have happened to
the price? It would have been driven sharply lower, of course. That's the
point, such dumping is designed to accomplish lower prices, period, and
that's the very definition of market manipulation.
For a closer-up look at this process, let's turn to
Sunday night and with a resolution of about 1 second (the chart above is with
5 minute 'windows' or candles as they are called). Here I want you to see
that whomever is trading in the thin overnight
market and is responsible for setting the prices is not humans. Humans trade
small numbers of contracts and in consistently random amounts.
Here's an example:
Note that the contracts number in the single digits to
tens, are randomly distributed, and that the scale on the right tops out at
80, although no single second of trades breaks 20.
Now here are a few patterns that routinely erupted
throughout the drops during Sunday night (yes, I was up very late watching it
all):
These are just a few of the dozens of examples I
captured over a single hour of trading before I lost interest in capturing
any more.
As I was watching this and discussing it with Adam in
real time, I knew that I was watching the sort of HFT/computer trading robots
that we've discussed here so much in the past. They are perfectly designed to
chew through bid structures and that's what you see above. They are
'digesting' all the orders that were still on the books for gold, to remove
them so that lower and lower stops could be run.
Anybody that had orders up against these machines,
perhaps with stops in place, or perhaps even asleep because this all happened
in the hours around midnight EST, lost and lost big.
There is really no chance to stand again players this
large with a determination to drive prices lower. At the very least, I take
the above evidence of computer assisted declines of this magnitude to be a
sign that our "markets" are completely broken and quite vulnerable
to a crash. That the authorities did not step in to halt these markets during
such a volatile decline, when they have repeatedly stepped into other markets
and individual equity shares on lesser declines, tells me much about the
level of official support for such a decline.
It also tells me that things are speeding up and the
next decline in the equity or bond markets may happen a lot faster than
anybody is expecting.
Unintended Consequences
If the intended consequences of this move were
to enrich the bullion banks and to chase investors away from gold and other
commodities and into stocks, what are the unintended consequences
going to be?
While I cannot dispute that the bullion banks made out
like bandits, I also wonder if perhaps instead of signaling that the dollar
is safer than gold, that the banks did not unintentionally send the larger
signal that deflation is gaining the upper hand?
With deflation, everything falls apart. It is the most
feared thing to the powers that be and for good reason. Without inflation,
and at least nominal GDP growth, if not real growth, then all
of the various rescues and steadily growing piles of public debt will slump
towards outright failure, and possibly collapse. The unintended consequence
of dropping gold so powerfully is to signal that deflation is winning the
day.
If this view is correct, then the current sell off in gold,
as well as in other commodities (detailed in part II), will simply be the
trigger for a loss of both confidence and liquidity in the system and
that will not bode well for the larger economy or equities.
In Part
II: Protecting Your Wealth From Deflation we explore the growing signs
that the money printing efforts of the central planners are seeing diminishing
returns and are failing in their intended effect to kick-start global
economic growth higher. Deflationary forces appear poised to take the upper
hand here, sending asset p rices lower --
potentially much lower -- across the board.
If deflation indeed manages to break out from under the
central banks efforts to contain it, even if only for a short period, how bad
will the ensuing wave of price instability be? How can one position for it?
How extreme will the measures the central banks take in response be? And what
impact will that have on asset prices, the dollar and precious metals?
We are entering a new chapter in the unfolding of our
economic emergency, one in which the risks to capital are greater than ever.
And the rules are increasingly being re-written to the disadvantage of us
individuals.
The one unfair advantage we have is that history is
very clear on how these periods of economic malfeasance end. Let's exploit
that as best we're able.
Click
here to read Part II of this report (free executive summary; enrollment required for full
access).
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