Let’s go straight to the conclusion: too many mysteries are occurring in the gold market, in 2013, to accept them as regular facts. No matter at which “side” you are of what we consider the most controversial asset, you simply cannot deny that the following list of events is something stronger than suspicious. Most importantly, although the mainstream media were very fast to announce the potential sale of 10 tonnes of gold by Cyprus, adding to the negativity around the yellow metal, the events in this article are of much higher importance, but they did not make it to the mainstream press. Maybe that is the most suspicious fact of them all.
THE SUDDEN BUT DRASTIC TURNAROUND IN INVESTOR SENTIMENT
Starting in December of last year, the predictions for the metals by large banks (including bullion banks) all turned suddenly very bearish. The fact that an outlook changes is not the key point. The sudden turnaround in a short time period right after the announcement of QE4 was the most suspicious fact. We analyzed several of the reports stating that the gold bull market is dead, for instance the one from Société Générale. We were really blown away from the underlying assumption that the debt levels, being one of the key drivers of the gold price, would not rise as from here. Mainly US debt has risen for more than four decades with an exponential increase in the last two decades. So what has fundamentally changed in the economy to reverse the trend? (image courtesy: Wiki)
Along the same lines, Credit Suisse this week announced their latest forecast of $1,100 gold. From Reuters: “Gold is going to get crushed. The need to buy gold for wealth preservation fell down, and the probability of inflation on a one- to three-year horizon is significantly diminished.” Well, what about inflation over the past twelve years? It could not have been the main driver for the gold price as appears from the following chart.
To be clear on this point, the purpose of this article is not to argue the price action. Price is down and has the potential to go lower, simple as that. The key point is that the arguments to support lower gold are too weak. So from a short to mid-term perspective, the market has shown a preference for other types of investment classes, which is fine / understandable / not arguable. But it does not provide answers for the structural issues like debt, monetary destruction, zero interest rates, inflationary monetary policies, currency wars, debt servicing costs, etc. So the bearish case is fundamentally weak, even if the market has decided to push the price down.
As author John Rubino laid out: “In the long run, fundamentals always win. With the whole world on a borrow/print/lie-about-it binge, gold’s fundamentals just keep getting better. Excessive debt leads to currency war leads to soaring gold.”
PHYSICAL GOLD MYSTERIES
Only a couple of days ago Eric Sprott analyzed the official US Census Bureau data. It proves that the US was again a net exporter of gold in Q1 of this year. The figures show that “$11.1 billion in exports of non-monetary gold and $4.1 billion in imports of the same, for a net export of $7 billion USD in non-monetary gold in the first three months of 2013. Using an average price of gold over this time period of $1,631 this equates to another 121 tonnes of gold that left the United States.” We do not know if these figures make it to the official reports; we can only rely on people on the field for a conclusion. Eric Sprott’s take on this is that the only plausible seller of that much bullion is the US Government.
Similarly, South Africa, being one of the most important gold producers, turned a trade surplus into a deficit in Q1 2013. “The $1.1 billion swing is entirely due to unusual shipments of gold from the US to South Africa in February and March. So far this year, 20 tonnes of unwrought gold (which includes bars created from scrap as well as cast bars, but not bullion, jewelry, powder, or currency), worth $982 million, has left John F. Kennedy International Airport, in New York. The shipments from JFK were the only unwrought gold to leave the US for South Africa in 2013; another large shipment occurred in September 2012.” (source) The same questions arise: who is selling that much gold, where is it coming from? And evenly important, where are these transactions registered?
In a more mysterious way, starting in January of this year, physical gold held at the COMEX warehouse has declined with a gigantic amount. The removal of the gold took place mostly in the eligible category. In that category, physical gold is stored at COMEX warehouses on behalf of banks or private parties, but it is not available for delivery for a futures contract. “Total drainage of physical inventories reached nearly 2 million oz.’s of gold [approx. 62 tonnes], which at today’s prices represent roughly $3 billion.” (source) Moreover, almost the entire change in eligible gold is driven exclusively by one firm: JPMorgan. On April 24th, there was an additional mysterious drop of 20%. At the recent record low on April 5, JPM warehoused commercial gold went as low as 4 tons, or 142,700 ounces.” (source) Since then, an even more mysterious move by JP Morgan has taken place. They have “converted” eligible gold into registered gold, an “intervention” which is described by Zerohedge as follows: “JPM and the COMEX appear to have the full liberty to adjust what is eligible and what is registered, at will, and can thus easily replenish inventory even when it is about to run out.” (see chart) No explanation for these moves has been given to date.
The potential sale of gold reserves by Cyprus got suspiciously too much attention in the main stream media. When calculating the potential impact on the gold market, we concluded immediately that the amount of 10 tonnes represented only a minor amount. In the same period, for instance, the imports from Hong Kong to China mounted to 220 tonnes, a historic high. There was simply too much light shed on the Cypriot news; it was out of proportion.
We witnessed a crash of the price of gold with a ferocity that defies normal measures. Quoting Russell Rhoads here: “For simplicity sake let’s call it a five standard deviation move. Statistically, we get a five standard deviation move approximately once every 4,776 years. So we should not expect another move like this out of the price of gold until May 17, 6789.”
As of the start of the year we witnessed a mass exodus of physical gold holdings out of the GLD. It notably occurred only in the GLD, not in SLV.
- GLD holdings in the first week of January 2013: 43,149,400.96 ounces
- GLD holdings today: 33,386,040.80 ounces
The difference of 10 million ounces of physical gold represents 312 tonnes. To put that figure into perspective, it is 30 times larger than the gold holdings of Cyprus; it would be the 18th largest gold holding in the world, comparable with the ones of Saudi Arabia and the UK.
The point is not the sale of the gold as we know it is caused by investor liquidation. The key question is who has been buying these gigantic amounts of physical gold? The gold is not being consumed, so it is in some hands right now. Which ones? We asked the question a couple of weeks ago in this piece, but it seems no clear answer exists at this point.
And of course, the fact it will take seven whole years to bring 1,500 tonnes of gold from the US back to Germany is a mystery on itself. Why so long?
Anecdotal evidence learns that the number of unsolved mysteries is reaching a point where an increasing number of observers have pointed to GATA’s work lately, even outside the gold community.
Here, it becomes more difficult. One of the conclusions of our research is that the gold market is characterized by a lack of transparency. Perhaps intended. Too many mysteries remain inexplicable. Unsurprisingly, they are mostly caused in the intransparant banking system.
It is clear that much is brewing below the surface of the gold market. There are too many significant evolutions related to PHYSICAL gold. The most credible assumptions we can come to are threefold:
- Strong hands are positioning themselves for fundamental risks that are inherent in the present monetary system. Physical gold is the only asset that offers monetary protection. Even the bullion banks, with gigantic short bets in futures markets, know that.
- There is tightness in some specific vaults, specifically the ones from US market participants. We simply cannot say which ones. Gold flows in a mysterious way to keep up the illusion that the fractional gold system is just doing fine.
- When it comes to central bank gold, we agree with the conclusion of GlobalResearch that a final clearing out of the vaults of central banks in countries that are part of the «golden billion» zone is currently underway. A scandal could be brewing, and it is going to have global economic and political consequences.”
And of course, the lack of regularization by the regulator is an obvious conclusion. So obvious, that we almost forgot to include it. Who knows, perhaps the anomalies occurring in the physical market could have the potential to balance some of the imbalances caused by the intransparent bank system.