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It was a jarring wakeup call this past Monday July 14, 2014 when everyone discovered that gold had plummeted some $30 overnight. It was the largest one-day drop for gold in 2014 and it almost was as large a down as the up day on June 19, 2014 following the June FOMC. It came just as gold appeared poised to move above $1,340/$1,350 and challenge the March 2014 highs up to $1,380. It was it seems not to be.
So what happened? Daily charts were mildly overbought, but weekly charts had considerable room to move higher. There was no particular news or events over the weekend that should have triggered the sell-off. The drop got underway shortly after 2 AM (New York time) in London when a seller of gold futures came in and pushed gold down roughly from $1,330 to $1,320. A bigger drop came later on and near the open in New York when someone dumped about $1.37 billion of gold futures pushing gold down to almost $1,300. Volume spiked on each collapse.
There were few explanations. Yes, the problems in Portugal's banking centre surrounding Banco Espirito Santo appeared to be under control and they were attempting to obtain a cease-fire between Israel and Hamas but there was no strong news that should have pushed the market down that much. No other markets were making any particular move.
But there was more. On Tuesday July 15, 2014, Janet Yellen was telling everyone that the economy was "ok" but they didn't want to encourage too much enthusiasm so the Fed would remain dovish and keep interest rates low for the foreseeable future. As everyone was nodding their heads another 17,000 gold futures contracts worth roughly $2.3 billion hit the market around 11 AM pushing gold prices swiftly down to about $1,290. As was usual the order came when volume was light and there was little resistance. That the market only fell roughly $16 to $20 was probably the only surprise considering the order to sell was larger than the one seen a day earlier.
It wasn't surprising finding pundits following the gold dump on Tuesday that they thought the real reason gold was dumped was because Yellen wasn't as dovish as they wanted. If one thinks about that, one would also realize that is a "pile of crock". Five years after one of the biggest financial crashes in history, the global economy remains moribund at best and on the edge of another crisis at worst. Yet that hasn't stopped the US stock market from rising to all-time highs pushed by abnormally low interest rates and riding on a sea of liquidity provided by the Fed and other central banks in the EU and Japan.
So dare I ask? Was the gold dump "manipulation"? No this dump wasn't as big as the dump on April 12 and 15, 2013 when over $23 billion worth of gold futures were dumped on the market causing a panic and pushing gold down $200. It was, however, one of the most dramatic dumps ever in gold history. To this day I have never seen a complete explanation as to who it was and why. Given the sales in April 2013 and the most recent sales came in large blocks all at once in thin market conditions suggests that it was one seller. No one with considerable size to move in a market would normally act in such a manner as to cause a panic, unless it was deliberate.
"Manipulation" is a difficult word to use when it comes to markets. Market participants would like to believe that the market is not manipulated to the benefit of a few and the detriment of most. But "manipulation" it appears is common and ongoing whether in the stock market, commodity markets and the gold market. Some of the largest and best-known investment banks in the world have paid billions in fines for manipulation of the LIBOR market, the currency market, the energy market and the sub-prime mortgage market. As is always the case they admit nothing, no one is arrested and they pay their fines totalling in the billions. But the fines are often a fraction of the profits they made suggesting that the fines are treated as a "cost of doing business".
Are large investment banking houses behind the latest sell-off for gold? I don't know. A name consistently mentioned is JP Morgan Chase (JPM-NYSE). It is believed that they have accumulated a huge short position in gold futures. Why would they or others do this? One possible reason mentioned here in the past is so they can buy physical gold at lower prices to cover positions from their leased gold. It was noted years ago that there was a suspected huge short position in central bank gold because of leasing. Could central banks requesting their gold back have triggered a move to try to buy back the short gold (physical)?
Other rumours have included the Fed itself although if it were they would most likely do it through proxies. It has been discovered that the Fed has been a huge buyer of US Treasuries through proxies in other countries even as they have been "tapering" QE. The result is that the Fed has purchased some 80% of Treasury issuances in 2014. If they are using proxies to purchase bonds, they could also be using proxies to sell gold futures. Other central banks could be involved as well. Even others such as China and Russia who have been large buyers of gold for their central banks have been suspected. A suppressed gold price would allow them to accumulate more physical gold at lower prices.
It could even be the US Treasury again through proxies and the Exchange Stabilization Fund (ESF) aka the plunge protection team. Showing that gold is a useless investment and a barbarous relic would suit the US when others have been calling for a new reserve currency backed by gold.
Could gold prices fall further? Yes. A drop in gold prices below $1,280 would suggest a test of $1,240/$1,250. Below that level and especially below $1,220 a test of $1,180 and the June and December 2013 lows could get underway. A sharp break under $1,180 could cause a panic and a sell off to $1,100 and even $1,000. All of this is in the "could" category. Will it, is another question and an unknown. Cycles suggest that the major low in gold should already be in.
So am I bearish on gold? Well short term one certainly has to be cautious because another April 2013 debacle could occur. Maybe just the fear of it occurring again means it may never happen. But that may be wishful thinking at the moment. Long term I remain quite bullish primarily because many of the conditions that took gold to $1,900 in 2011 have never really left. They have instead gotten worse.
The stock market is overvalued by numerous measurements. Many believe that valuations are higher than they were in 2007 before the 2008 financial crash and in some instances approaching where they were in 2000 prior to the high tech/internet crash. Seems that even Warren Buffet has noted the market as being overvalued. Janet Yellen commented on the stock market sounding strangely like Alan Greenspan circa 1996 and his "irrational exuberance" statement. While there is evidence the smart money is getting out, funds still pour into the stock market because they believe they have to be there or they will miss it.
Global debt today is at higher levels then it was in 2007 prior to the 2008 financial crisis. Government debt to GDP, government debt to revenue and total debt (government, corporate and consumer) debt to GDP levels are all higher around the world today than they were in 2007. Japan is the worst. But the US isn't far behind. In the EU it varies from country to country but Great Britain is the worst, even worse than Greece, Italy, Spain or Portugal. Yes Britain can absorb it better. Or can they?
Austerity measures in Britain or elsewhere have not been accepted and social unrest and the rise of xenophobic right wing parties has been a by-product of the global financial crisis. GDP growth since 2000 and probably from even earlier has been almost solely because of the huge rise in debt not because the economies are actually performing well. An exception of course has been China although even they and other emerging economies have succumbed to growing their economies through the issuance of more debt. Debt levels have become so high that some officials have expressed concerns that another Lehman Brothers type of collapse could happen.
And then there is the Quadrillion dollar plus derivatives market. The derivatives market maintains its mantle as the accident that could happen and bring down the global banking system. Even a partial collapse in the derivatives market could wipe out the capital of many global banks. Leverage levels at the major global banks remain at 20%, 30% and higher at levels seen before the financial crash of 2008. The large investment banks were behind the financial crash of 2008 than bailed out by the taxpayer and have fought reform even since.
The global geopolitical situation remains in flux. The wars and strife may come off the front page but in behind the wars and conflicts continue. Russia/Ukraine, Israel/Palestine, Syria/Iraq, Libya and China/Japan/USA are today the worst. The fear is that they spread or an accident occurs that triggers a wider conflict. Ratcheting up sanctions against Russia may play well on the domestic front in the US but the EU and others are refusing to go along with the game. Russia is the eighth largest economy in the world and combined with China and the other BRICS they have the capability and capacity to make things difficult economically for the US and the West. But as noted take the geopolitical conflicts off the front page and everyone quickly forgets they are happening, that is until they flare up again.
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
Gold has suffered a mini plunge by parties unknown and for unknown reasons. An event such as the Malaysian passenger plane allegedly shot down over Eastern Ukraine today could spark a short covering rally. Then again they may be back again for another "dump". That is why it is important for gold to take out key levels to the upside to send the bears scurrying for cover. The key levels are at $1,380 the March 2014 high, $1,430 the August 2013 high and $1,550 regaining the breakdown level prior to the April 2013 collapse. Until those happen gold remains in a bear market with risk to the downside from parties unknown to "manipulate" gold lower.
