This market commentary is written by Adrian Ash from Bullionvault.com, who publishes a daily market update. Jumping to $1229 per ounce in London trade Wednesday, gold defied analyst expectations and reversed earlier 1% losses after stronger-than-expected US jobs data. Today’s private-sector ADP Payrolls Report said 215,000 jobs were added in the US last month, against consensus forecasts of 173,000. Rising ahead of that number, used by some as an advance guide to Friday’s official US non-farm payrolls figures, gold had then fallen $5 per ounce before jumping 0.9% in volatile trade. Gold “[had] hit a fresh 5-month low in every session this week,” says the Reuters newswire. “Recent short-term stabilisation was much weaker and shorter than expected,” says the latest technical analysis from Axel Rudolph at Commerzbank in Frankfurt. Repeating the same view on silver, “Remains bearish,” Rudolph concludes. “Gold has a decent chance of retesting its 2013 lows sometime in December given all that is going on,” reckons Edward Meir at brokerage INTL FCStone, citing this coming Friday’s US jobs data and then the Federal Reserve meeting ending Weds 18 Dec. “Support is at the major low of $1180 from June 2013,” says chart analysis from London market-maker ScotiaMocatta, warning that technical indicators suggest “gold has room to fall further before being hindered by ‘oversold’ signals.” But “The main risk for gold is a short squeeze,” counters ANZ Bank, pointing to the large short position now built up by speculative traders in US gold futures. Previously peaking in early July, the gross short position in US gold futures and options was quickly unwound as the gold price began a 20% rally from June’s 3-year low. ”Comex gold shorts are at a 4-month high ahead of Friday’s US employment data,” agrees Walter de Wet at Standard Bank in London, noting the latest US futures positioning figures. Either that means “disappointing data could very likely trigger large-scale short covering and push gold higher, quickly,” says de Wet. Or Friday’s non-farm payrolls report “is irrelevant to participants as the majority looks through the noise towards the end goal, i.e. tapering and a slow normalisation of US monetary policy which is coming closer by the day.”
My trading partner JW and I had a great talk the other day which spurred to the creation of this interesting and educational gold futures trading article we wanted to share with you.
Throughout most of 2013, gold futures have been under major selling pressure. Gold opened the year trading around $1,675 per ounce. As of the 12/02/13 close, gold futures were trading around $1,220 per ounce which would mean that thus far in 2013, gold futures have lost more than 27% of their value.
Looking back to September of 2011, gold’s all time high came in around $1,923 per ounce. In a little more than 2 years, gold prices have dropped around $700 per ounce representing a total loss of more than 36% based on the 12/02/13 closing price. I would say most analysts would agree that gold has been in a bear market over the past two years.
Before we begin looking at a few ways to use the gold etf GLD option structures to take advantage of higher future prices in the yellow metal, I thought I would focus readers’ attention on some bullish fundamental data for gold. Let us begin with a chart of the Federal Reserve’s Total Assets which is shown below.
The data shown above comes directly from the Federal Reserve’s public database itself. Essentially, this is the Fed’s balance sheet and its obvious that the money printing has gone parabolic. The Federal Reserve prints money to purchase Treasuries and mortgage backed securities which end up on the Federal Reserve’s balance sheet.
Interestingly enough, the chart above illustrates the amount of money the Federal Reserve has been printing since the beginning of 2011. The chart below illustrates the price of gold futures during the same period.
Gold futures have moved lower in price while the Federal Reserve has printed an unprecedented amount of money through the quantitative easing program. It has been pointed out that the flow of liquidity is more important than the total money stock, but these two charts when viewed together are rather odd at the very least. However, we must all continue to remind ourselves that there is no manipulation of any kind going on . . .
Another odd situation has developed regarding the gold miners and the price of gold relative to production costs. The gold spot price has essentially moved down below the average 2013 cash cost of $1,250 – $1,300 per ounce. Price action in gold futures is rapidly approaching the marginal cost to produce gold which is around $1,125. The chart of the various gold production costs is shown below.
Gold prices closed on 12/02/2013 at $1,218 per ounce. Based on the closing price, gold futures are less than $100 per ounce away from the marginal cost to produce gold. If the yellow metal’s price moves below the cash and marginal cost of production gold mining volumes world wide will begin to decline.
The gold miners have likely already started lowering their production levels at current prices. The production slow down would only accelerate should prices move down below the marginal cost of production. I believe that these production costs will help put a floor underneath gold prices in the longer-term.
It is widely known that there is strong current demand for physical gold coming from Russia, India, and China. If the gold miners began to slow production levels considerably it is likely that physical gold prices could explode to the upside.
Should production levels decline while demand remains at the same level all of the manipulation in the world could not stop gold prices from arriving at their natural market based price. I think most readers and analysts would agree that the natural market based price is higher, not lower from the marginal and cash costs of production.
As many readers know, my primary focus as a trader is in the world of options where I focus primarily on implied volatility and probabilities to formulate new positions. Unfortunately options on gold futures are fairly limited and are not actively traded. However, the options on the gold ETF GLD are very liquid.
With the longer term fundamentals intact, I thought I would post a few possible trading ideas using GLD options to get long GLD while giving the trader some duration to allow for the time needed for the trade to work.
A fairly cheap way to construct a longer-term bullish position in GLD would be to look at a June 2014 Call Debit Spread or a June 2014 Broken-Wing Call Butterfly Spread.
These trade structures use multi-legged constructions and would essentially allow traders to get long GLD.
Due to the inherent leverage built into options, these positions would not require near as much capital as buying an equity stake in GLD or being long gold futures. The trade structures mentioned above would also mitigate Theta risk, also known as time decay so the passage of time would not have a significant impact on the trade’s overall profitability.
In fact, both of these trade structures would actually benefit from the passage of time in terms of profitability down the road. There are a variety of other trade structures that could be used to benefit from higher prices in GLD while simultaneously capitalizing on the passage of time as a profitability engine. Each trade construction carries a variety of different potential risks as well as required capital outlay or margin encumbrance.
I want to be clear in stating that these trade structures are purely for educational purposes and should not be considered a solicitation or investment advice. Whether we are discussing gold futures, GLD, or GLD options these are all paper investments and they should not be viewed as a substitute for physical gold holdings. Physical gold would likely benefit the most from any supply shock in the future.
In closing, I believe that the fundamental picture for gold is improving by the day. While more downside is likely in the near-term, the longer-term picture for higher gold prices in 2014 and beyond seems quite likely.
In a world where central banks are printing fiat currency at record rates, at some point in the future physical gold prices will no longer be able to be held back from true price discovery.
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By: JW Jones & Chris Vermeulen
By Bud Conrad, Chief Economist
Bud Conrad, Casey Research chief economist, predicts in this fascinating interview with Future Money Trends that the US dollar will implode and be replaced with a new currency, quite possibly one backed by gold. Then why is the gold price dropping like a brick in the face of dollar devaluation? Watch the video for Bud’s eye-opening answer…
Is now a good time to load up on gold—and how should you invest? Get all the details in our FREE Special Report, The 2014 Gold Investor’s Guide. Click here to read it now.
Analysts everywhere appear to be wondering what could possibly be the catalyst to turn the gold market around. I maintain it’s the same catalyst that drove the gold bull market from 2001 to 2011. Out of control currency debasement.
Does anyone seriously think that we can print trillions of dollars out of thin air for five years and not eventually have something bad happen? The next the black swan is already staring us in the face. It’s going to be a collapse in the purchasing power of the US dollar.
Since the beginning of the year the dollar has been showing signs of extreme stress as it began to oscillate violently back and forth in what is known as a megaphone topping pattern. When this pattern breaks to the downside it is going to initiate the beginning stages of what will likely be a fairly severe currency crisis by next fall.
In this environment I think it’s going to be impossible for the manipulation in the gold market to continue. As a matter of fact I got a signal last Tuesday that indicates to me that the forces trying to manipulate gold down to $1000 have probably thrown in the towel and given up, realizing that an impending dollar crisis is about to begin.
On a cyclical analysis basis, the intermediate cycle is now running out of time for a move all the way back to the $1000 level. As you can see in the chart below the average duration for an intermediate degree cycle is between 20-25 weeks. Currently gold is on the 23rd week of this cycle.
On a smaller time frame you can see the current intermediate cycle already has four daily cycles nested within it. I don’t believe there is time for a fifth daily cycle, and a fifth daily cycle would be required if gold were going to make it all the way down to $1000.
On top of that the current daily cycle is now stretched to 34 days which is already longer than 90% of historical cycles. What this means is that gold is very late in its daily cycle and a bottom is due at any time. The logical trigger would be on the employment report Friday, although I think the market will be expecting that so we may get a bottom earlier in the week.
Last week’s sentiment polls are also suggesting that bearish sentiment has reached levels where the market is at risk of running out of sellers. I expect when the current weekly sentiment poll comes out later this evening we will see sentiment in both gold and silver at levels comparable to the June bottom.
To top it all off I’m starting to hear some of the usual clichés that always appear at major turning points.
“The charts are pointing down”
Folks, at bottoms the charts will always say the market is going lower. And at tops the charts will always say the market is going higher.
Then there are the numerous calls for completely unrealistic targets. I’m now starting to hear $700 price targets for gold.
I believe we are within days of a final bottom in this intermediate cycle. I think an initial 10-20% position can be taken anytime this week. Then once we get confirmation of an intermediate bottom one can start adding to that position.
I’ll say it again, if one can pick, or even get close to, buying at a bear market bottom the initial move out of those bottoms are where the biggest gains in this business are made. The first two months out of the 2008 bear market bottom miners rallied 100%. I don’t think it’s unreasonable to expect something similar this time as this bear market has been every bit as severe as the one in 2008.
And one final confirmation before I forget. Oil appears to have put in a final intermediate bottom. Look for oil to lead the commodity complex out of this bottom.
Gold was down today $28 and closed the COMEX session at $1222.05, which is a loss of 2.30% on the day. Silver went $0.77 lower and closed at $19,21, a decline of 3.87%. In euro terms, gold closed the trading session at €902.82 and silver at €14.18.
The short term trend is clearly down, both in gold and silver. The hourly chart tells a clear story.
The short term trend is confirming the longer term downtrend. The daily chart shows an almost perfect trendline since November 2012. Apart from the trendline, the daily chart reveals two other important things.
First, both gold and silver are about to retest their June lows. Needless to say those price points are of major importance. In case they would hold with a vengeance on high volume, it could turn out to be bullish for the metals. However, if support would fail, the odds favour a break through.
A second important element on the daily charts are the Commitment of Traders positions (lower part of the charts). The extreme market situation of June is back: commercial hedgers are holding historically low net short positions. Extreme positions of that “informed money” category usually point to a reversal, although timing is unpredictable. Back in June, when the metals reached their lowest price points, the COT positions were very similar as today. The third chart shows that situation in more detail.
This chart, courtesy of Sentimentrader.com, shows the positions of the commercials (green line) and large/small speculators (blue/red line). Notice the similarity with the situation in June of this year.
Exactly a year ago, Japan announced its monstrous monetary stimulus, beating even Helicopter Bernanke who had just started its fourth round of QE. The Japanese government was fed up with deflation and decided to stimulate their economy with massive liquidity (QE).The Nikkei index started an historic rally with a gain of 50% in less than half a year (see barchart on the chart below). The value of the Yen dropped like a stone (see black line on the chart below). The aim of a weaker Yen was to stimulate exports. So it should have been a win-win-win situation, at least on paper.
lied to told every day again that weak currencies are a good thing as they stimulate export and increase the economic output (rising GDP). While that could be true, there are a lot of conditions and consequences that are associated with it. One condition, for instance, is that all other countries should keep the value of their currency flat, which is obviously not the case in Currency War III.
Patrick Barron explains how mainstream economists believe that currency devaluation exports unemployment to its trading partners, apart from enhancing sales from exports. “They call for their own countries to engage in reciprocal measures. Recently Martin Wolfe (Financial Times in London) and Paul Krugman (New York Times in the US) both accuse their countries’ trading partners of engaging in this “beggar-thy-neighbor” policy and recommend that England and the US respectively enter this so-called “currency war” with full monetary ammunition to further weaken the pound and the dollar.” This is no currency war, this is currency suicide. Source:Mises.org.
One of the consequences of Japan’s intended currency debasement is now starting to show its ugly head. The cheaper Yen may be intended to stimulate exports but it simultaneously makes imports more expensive.
From Japan Times:
Japan is likely to post a record trade deficit in fiscal 2013 because the weaker yen and soaring demand for energy have driven up the cost of importing fossil fuels, according to a projection by a trade business group.
The deficit is expected to expand to ¥12.1 trillion during the year through next March, much worse than the ¥8.18 trillion in fiscal 2012 and the largest since comparable data became available in fiscal 1979, the Japan Foreign Trade Council Inc. said Thursday.
The economy will log a trade deficit for the third straight year, according to the organization, which is composed of companies involved in international trade activities.
Exports in fiscal 2013 are forecast to rise 9.8 percent from the previous year to ¥70.18 trillion, sustained by the yen’s fall, while imports are expected to climb 14.1 percent to ¥82.28 trillion, JFTC said.
A sliding yen usually supports exports by making Japanese products cheaper abroad and boosts the value of overseas revenues in yen terms, but it also increases import prices. Japan depends on imports for more than 90 percent of its energy needs.
Unfortunately, the economy is not as simple as central planners pretend it to be, at least not in the 21st century. The globally interconnected world, the huge volumes of derivatives (currently tenfold the global GDP), the increasingly complex financial world, the “easy money” policies from competing regions … all play an almost unpredictable role. We have not seen to date a model from the academicians at the central banks taking those variables into account.
The consequence in the real world of the weaker Yen is not only limited to more expensive imports. Another ugly effect is that the speculative effect kicks in, accelerating the “unintended consequences.” As the Yen got back into is declining trend, hedge funds took notice of this and are now betting on a continuing decline. As Zerohedgenotes: “While ‘economists’ are less convinced that the JPY will weaken further, and even the Japanese officials somewhat jawboning the currency’s stability now, futures traders have pushed ‘net shorts’ (i.e. bets against the JPY) to their highest since July 2007. Between the possibility of a Fed taper (stronger USD) and fading economic gains (more BoJ QQE), it would appear that Japan’s $70bn per month buying program is not going to shrink anytime soon. While the world has grown accustomed in recent months to ‘hating’ gold – despite the ECB and BoJ rumors of more money-printing and an inevitable un-taper by the Fed – for now, the ‘dislike’ of the JPY has exploded.” Precious metals investors have learned in 2013 that a price crash is likely when hedge funds go aggressively short.
The message we are trying to bring across is not that a crash is inevitable and imminent. We point out that it is likely to happen and that these are consequences of interventions.
The sentiment indicators provide a confirmation of the ultra weak Yen. As the latest Sentimentrader report shows, the Yen carries the most negative sentiment of the major currencies.
Precious metals sentiment is not much better, but that is not surprising, at least not in the worst year for the metals since four decades.
What is the key take-away from this evolution? We see several conclusions and learnings in the bigger scheme of things, so this does not concern traders but only investors:
- Currency wars are here to stay. As Rickards has noted, currency wars are like real wars; there is not a continuing war all the time but there are different battles over time. Prepare for more to come, even more importantly, expect much worse in the current decade.
- Do not rely on the narrative of governments. They have their own interest and they will only tell you half the truth. Currency devaluations have a very damaging effect. They are simply one of the many monetary tools of central banks hoping to solve a structural problem. Our structural problems are so big that a normalization of economic conditions will come with a lot of pain and “unintended” consequences.
- Gold’s key benefit, i.e. the ultimate monetary insurance policy, remains intact. The currency war seems under control. As the sentiment figures show, the dollar is still the best of all bad currencies. When the dollar starts sliding, gold owners will have the best protection. It could still take several years before that happens, as the strength of the petrodollar hegemony should not be underestimated. It is better to be prepared in advance.
Be prepared. The fundamental outlook is NOT one of an economic recovery.
Despite the insanity of recent market rally and overseas financial issues, my followers and I are enjoying continued success with my TheGoldAndOilGuy program. Those who trade futures could be earning a robust 82% average annual return in 2014 with the new implementation of my automated trading system for the SP500 index.
Isn’t it strange? We are living in the 21st century, a period of time in which people buy land on the moon, humanity has dozens of satellites providing GPS services and real time traffic information, internet brings people and information as close as one click, science and technology are making historic break throughs … but economists cannot agree on the real cause of the latest financial crash (2008).
Generally speaking, there are two schools of thoughts when it comes to diagnosing the 2008 crash. One is based on free market principles and is detailed in Austrian economics. The other is based on central planning and is centered around Keynes (hence, Keynesian economics).
As noted by Barrons, journalist Jeremy Hammond had the ingenious idea of contrasting the Austrian, free-market school of economics with the Keynesian, pro-government school on the recent financial crisis through a close examination of the words of two commentators: former Congressman Ron Paul, schooled in the Austrian perspective, versus the Nobel Prize–winning Keynesian and New York Times columnist Paul Krugman. You might think a mere politician would be no match for a Nobel laureate, but in this case, think again. As forecaster, diagnostician, and prescriber, Ron Paul offers rich insights, while Krugman, true to his Keynesian perspective, gets things wrong at virtually every turn.
Hammond’s book “Ron Paul vs. Paul Krugman: Austrian vs. Keynesian Economics in the Financial Crisis“ reviews the records of Ron Paul and Paul Krugman on the question of the housing bubble. Who correctly predicted it? Who has offered the more reasonable explanation as to its cause? Who has offered the more sensible response to the bursting of the housing bubble and the financial crisis its precipitated? Most importantly, whose admonitions should we now be regarding as we move into the future? In short, who is the true prophet, and who the false?
To illustrate the objective analysis of the book, we show one of the many quotes that the author has used. This example is a quote from Paul Krugman a couple of days before the NASDAQ implosion:
In February 2000, Krugman hailed the “booming” economy and “extraordinary prosperity” the country was experiencing. As the bubble neared its peak, he commented on the view that “the whole stock market, not just the Dow, is inflated by a speculative bubble.” He said that he was “sympathetic but not entirely convinced” of this view. “I’m not sure that the current value of the NASDAQ is justified, but I’m not sure that it isn’t.” Thus, on the eve of it bursting, Krugman was still not convinced of the existence of the bubble Ron Paul had already been warning about for years.
Another illustrative example is a quote from Ron Paul after the NASDAQ crash who more or less predicts the next financial crisis based on the Fed’s monetary policy:
In October 2000, Ron Paul observed that with the ongoing financial crisis, politicians and economists were “talking about a symptom and not the cause. The cause is the Federal Reserve. The problem is that the Federal Reserve has been granted authority that is unconstitutional to go and counterfeit money, and until we recognize that and deal with that, we will continue to have financial problems.” He repeated, “we have already seen signs of economic troubles ahead” because the Fed had planned to continue its monetary inflation in answer to the financial crisis. “Without savings, true capital investment cannot be maintained,” he said. “Creation of credit out of thin air by the Fed was the original problem, so it surely can’t be the solution.”
Gold prices fell the most in more than two months last week mainly due to renewed speculation over the timing of the US Federal Reserve’s (FED) tapering of its monetary stimulus programme.
After breaking below certain key support levels, the price of spot gold ended the week with a 3.5% drop to end the week at $1243.70 per ounce. After dropping below $1300 an ounce, the selling accelerated on Thursday taking gold through the support level at $1,250, which many analysts saw as important for the market to hold. While prices have managed to hold above $1240 an ounce, traders are eying this level as a break below could signal more technical selling with some analysts even suggesting a dip to the $1,220s as possible as bearish technical charts and little positive news is available to offset the price-negative sentiment in gold.
Interestingly, gold trading on Comex was interrupted twice last Wednesday, according to Nanex, which provides exchange data and summarizes high frequency trading activity.
Nanex reported that about 1,500 gold futures contracts traded in one second at 6:26:40 a.m. Eastern time on Wednesday, triggering a $10 drop in prices and a 20 second trading halt.
Damon Leavell, a spokesman for the exchange said trading was halted for about 20 seconds at 6:26:41 a.m., New York time. The December contract fell about $11 in less than a minute before trading was suspended.
Then, immediately after the release of the Fed minutes, came another burst of selling which led to gold futures being suspended for another 20 seconds. The second bout of concentrated selling is believed to have been even more than 1,500 contracts. Each contract is worth 100 ounces so 1,500 contracts is worth nearly $200 million.
Shortly after 1 am Eastern Standard time on Monday, someone tried to dump 1500 gold contracts into an entirely illiquid gold futures market. The 150,000 ounce notional sell order ($184.5 million), sent the price down $10 instantaneously and tripped the exchange’s circuit breakers and halted the market’s trading for 20 seconds (once again). This is now the fourth time this has happened in the past 3 months, and this time on no news whatsoever.
It is becoming increasingly obvious that someone out there is trying to suppress the price of gold and this is happening far too often to be a mere coincidence. The market was halted on similar drops on April 20, 2013, September 12, 2013, October 11, 2013 and November 20, 2013.11.26
This repeated action suggests that someone out there is determined to undermine the confidence of potential gold investors.
Since the end of October, traders have dominated the gold market, betting on the possibility that the Fed will soon reduce bond purchases even though Janet Yellen said last week that she would continue with the bank’s ultra-easy monetary policy until officials were confident a durable economic recovery was in place that could sustain job creation.
While the tapering of the Feds stimulus is mere conjecture, it has nevertheless created a bearish sentiment amongst traders who have used the futures market of Comex to sell massive amounts of gold contracts causing prices to fall by around $100 an ounce in the last three weeks.
As far as I am concerned, this frequent irregular action is part of a strategy of central bankers and Western politicians to beguile individuals into investing in equities and bonds or simply get further into debt. The major central banks, the US Fed, ECB, BoJ, and BoE are all engaged in monetary expansionary programmes renamed quantitative easing. In simple terms, they are printing more and more money. At the same time they have dropped interest rates to almost zero. So, individuals who have saved are getting nothing on their savings while at the same time the purchasing power of their money is becoming less each month. It is a dilemma for pensioners because the money they are receiving in interest payments is not enough to get by. And, for those hard working individuals who like to save, having money in a deposit account is hardly a proposition. So, in order to find a higher return, they are being persuaded to invest in equities.
While investing in equities is not a bad thing at all, the current scenario is anything but healthy. Prices of global equities are being artificially propped up by the policies of these central banks and have nothing to do with stellar economic growth.
As the prices of stocks continue to rise, individuals are being persuaded to buy these to keep prices moving upwards. Alternatively, they are being induced to use the low levels of interest to buy homes and cars and thus get themselves further indebted to banks.
In the UK total personal debt has reached record highs – 1.4 trillion pounds.
According to a report by the Centre for Social Justice (CSJ) an average household debt of 54,000 pounds is now almost twice the level of a decade ago. Indebted households in the poorest 10% of the country have average debts more than four times their annual income.
According to the report, entitled ‘Maxed Out’, over 130,000 people declare bankruptcy or some other form of insolvency each year in the UK. More than 8 million households have no savings at all, affecting about 50 percent of low-income households. Consumer debt has trebled since 1993, reaching nearly 160 billion pounds in 2013.
“Years of increased borrowing, rising living costs and struggling to save has forced many families into a debt trap that is proving very difficult to escape,” director of the CSJ, Christian Guy, explained, warning that problem debt can have a “corrosive impact on people and families,” affecting their mental health, relationships and wellbeing.
An estimated 1.1 million people over 50 years old are in problem debt.
The study, led by former Labour Party politician and Pensions Minister Chris Pond, said that problem debt carries a major human cost.
“With falling real incomes and increasing costs of basic essentials, many – especially the most vulnerable – are sliding further into problem debt. The costs to those affected, in stress and mental disorders, relationship breakdown and hardship is immense. But so too is the cost to the nation, measured in lost employment and productivity and in an increased burden on public services.”
With the rising costs of domestic energy and other major household bills, more households might be pushed into problem debt, the study warns. In 2012 an estimated 1.85 million households were three months in arrears on at least one household bill or payment.
“The 25 percent increase in the cost of living over the past five years combined with job insecurity and low savings mean that many households have been pushed over the edge,” the study says.
“Those on a low income are not victims of a housing bubble or an international banking crash, but of a financial system that is rigged against them.”
While, banks and governments can borrow at low interest rates, risk free because if they fail, they will get bailed out, savers are being penalised and duped into thinking that they must invest their money into equities, bonds or homes.
This is a bubble about to burst. It may not be now, but it may be next year or even the year after. However, once it does burst, these people will lose fortunes.
Whether you believe that gold prices are manipulated, or not, is your decision. But, let me remind you that most of the most highly respected and well–known banks in the world have all been found guilty of manipulating Libor, energy, and currencies. They were also found guilty of lying to their own clients about buying useless mortgage back securities and other assets. And, while these banks have had to pay billions in fines for their actions, not one single banker or government official has been prosecuted.
When it comes to gold, Bloomberg recently reported that the U.K. Financial Conduct Authority is reviewing gold benchmarks as part of its wider probe of how global rates are set. Evidently, the FCA review is preliminary and hasn’t risen to the level of a formal investigation.
One of the key benchmarks is the London gold fixing, a measure of the spot price for physical gold that is set twice daily by five banks. Regulators around the world are examining alleged abuses of a number of financial benchmarks by companies that play a central role in setting them. Inquiries were triggered after it emerged the London interbank offered rate, or Libor, the benchmark interest rate for more than $360 trillion of securities worldwide, was being manipulated.
The London fix, the benchmark rate used by mining companies, jewellers and central banks to buy, sell and value the metal, is published twice daily after a telephone call involving Barclays Plc., Deutsche Bank, Bank of Nova Scotia, HSBC Holdings Plc., and Societe General.
Even though prices may change immediately after the fix, it has been a tradition that dates back to 1919.
The U.K. Financial Conduct Authority is scrutinizing how prices are set in the $20 trillion gold market, according to a person with knowledge of the review who asked not to be identified because the matter isn’t public.
The process, during which gold is bought and sold, can take from a few minutes to more than an hour. The participants also can trade the metal and its derivatives on the spot market and exchanges during the calls. Just after the fixing begins, trading erupts in gold derivatives, according to research published in September. Four traders interviewed by Bloomberg News said that’s because dealers and their clients are using information from the talks to bet on the outcome.
According to the London Bullion Market Association, London is the largest centre for gold trading in the world. Around $33 billion changed hands there each day in 2012, exceeding the $29 billion of futures traded on Comex, data compiled by Bloomberg show.
The FCA review is preliminary and not a formal investigation, another person said. The people wouldn’t say what’s being looked at or if regulators suspect wrongdoing. Regulators are looking into how benchmarks are set and governed across the financial system after five firms including Barclays and Royal Bank of Scotland Group Plc were fined a combined $3.7 billion for rigging the London interbank offered rate, or Libor.
Investigators from Switzerland to Hong Kong are probing currency markets after Bloomberg News reported in June that traders communicated with each other and timed trades to influence foreign-exchange benchmarks and maximize profits.
If gold prices continue to slide, it is essential that you are not beguiled into thinking that you own a barbaric relic. There is enormous value to owning gold. And while it may not be apparent now, things are bound to change in the very near future. The Chinese have already figured this out and that is why they are buying as much gold as possible.
They are also making currency deals with many of their counter parties so that they do not have to trade through dollars. Recently, China announced that they will be invoicing their oil imports in renminbi in yet another major step to avoid using the US dollar as the world’s reserve currency. This means that China will have bilateral trading arrangements with Russia and the other major countries, such as Iran, that provide energy to China.
And, as Western central banks, and their agent bullion banks persist in suppressing the price of gold with their paper contracts, Asian countries will continue to take the physical gold.
Don’t be fooled. Continue to add gold to your investment portfolios.
The recent fall in gold prices has broken various support levels, indicating a possibility of further downside action and sideways consolidation.
About the author: David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients. For more information go to www.lakeshoretrading.co.za
Something may have changed today in the gold market. For one I think gold probably formed a minor daily cycle bottom today. But what I’m really talking about is the complete recovery from another middle of the night attack. For most of the last year these late night attacks have worked wonders for sending gold crashing through technical levels and triggering stops. Today however it simply didn’t work for the first time.
It’s been my opinion for months now that the forces behind these take downs were trying to push gold back down to the 2008 C-wave top at $1030. At which point I expected they would flip sides and go long for the bubble phase of the bull market. After watching gold fight off the manipulation today I’m starting to wonder if gold has been pushed as far as it’s going to go.
At some point all artificial markets finally say “enough is enough” and the fundamentals regain control and take the market back in the direction it was meant to go. Usually more aggressively than would have happened naturally. We saw this in spades in 2008/09.
If gold is finally ready to break free of the year long manipulation then we may have printed a final bottom today. The next couple of days should tell the tale. If gold can rally $40-$50 tomorrow or Wednesday, and the miners 5% – 10% on heavy volume that would in my opinion be a strong signal that today was more than just a minor daily cycle low. If gold can deliver a powerful follow through surge off of this reversal then we may just have a final intermediate bottom, and maybe, just maybe, the bubble phase of the bull market is ready to begin.
I told my subscribers this afternoon, miners have the potential to form a 2b reversal (a technical signal that sometimes spots an exact bottom or top of a trend). One could take a long position at the open tomorrow and put a stop right below today’s intraday low. If the 2b reversal is valid then the low will hold and the stops will not get triggered. If nothing else it’s a low risk setup with a minimal loss but huge upside potential if we did print a bottom today.
If the manipulation is going to continue it will probably try to regain control tonight. If we see another premarket hit tomorrow then step aside and wait to see if gold can fend off the attack again.
As of 7 O’clock this morning the attack on gold has begun. The intervention is going to try and hold gold below $1250. If gold can fight off the attack two days in a row, that would be a strong sign the daily cycle has bottomed and maybe the bull has finally broken the manipulation.