63 replies to this topic

[DrunkCat]

Hi HDB, Since the short was made via a future derivative one can expect the price of gold to rise again when he will have to close the short any idea of the time limit of that future transaction?

[franz]

How the gold market was manipulated… Legally

 

by Francois Joubert, 17 April 2013

Tags: gold, gold price, gold market

The gold price dropped from a high of $1,562 on Friday to a low of $1,350 by Tuesday this week. Everyone's been shouting about this $212 drop in the gold price but no one really has a clue what's going on… When speaking to one of my colleagues, Chris Mayer, in the USA on Monday about gold's 'impressive' crash over the weekend Chris told me: "I never saw it coming. I am as surprised about it as I've been about anything in markets in my whole career." If you, like me, have been wondering about this drop I've researched the answers for you…

And the fact is, the gold price was a victim of a massive market short, legal manipulation. Read on to find out more, and where to for the gold market from here…

 

The gold market was manipulated legally…

 

According to a very well known commodities trader, Ross Norman, the drop in the gold price was as a result of a carefully thought out plan to push the gold price lower…

It started as an anonymous institution sold 100 tons of gold on Friday morning.

What makes this so significant is that the sale of this 100 tons of gold was done on the futures market, without any 'real' gold backing the sale…

Now 100 tons of gold is a lot of gold. It's nearly how much AngloGold Ashanti produces in a year…

 

And then, Two hours after the initial selling, rumoured to have been routed through Merrill Lynch's floor team, a more significant blast hit as this shorter sold a further 10 million ounces of (300 tonnes) over the following 30 minutes of trading.

That's right, someone sold as much gold as the two largest gold producers in the world produce in a year, in a mere 30 minutes.

 

But if it were real gold they were selling, fine… However this was gold futures. 'Paper' gold. Gold that doesn't exist, and if the seller had to produce this gold for delivery they'd have been hard pressed to get access to that much gold…

This short seller didn't do anything illegal. As a mere 6 months ago a key US law was changed, allowing traders to make 'unlimited' short trades on the futures market… Allowing them to actually short a market with more of a commodity than 'actually exists in the world'.

Now the fact is, flooding any commodities market like this would see it's price crash…

The timing was perfect to crash gold

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 worldwide - too much for the market to readily absorb under any circumstances…

But with the Fed releasing an early statement saying the US recovery is going well and QE will stop soon, and then Goldman Sachs' report that the gold price will head down this year,  the assault to the short side was essentially saying "you are long... and wrong".

 

The value of the 400 tonnes of gold sold is approximately $20 billion. But because it is margined, this short bet would only require a big institution to stump up $1b. 

The rationale for the trade was clear - excessively bullish forecasts by many banks in 2012 and early 2013 got a lot of people long gold. It sent the gold price up nicely (gold hit its highest level in rand terms ever in 2013). 

And then, by forcing the market lower by flooding it with a massive oversupply of (non-existent) gold the institution shorting sought to create a massive market avalanche of additional selling as stop losses were hit and margin calls were made…

 

Where to for gold from here?

 

With this crash there'll be a lot of investors tending to their 'wounds'. The shorts can still pile in and push the price down more from here.

But, with the underlying fundamentals still in place there's still some momentum behind gold's price going up.

The US is still doing QE, and I for one don't believe reports that the country is out of the woods yet…

They'll have to keep interest rates artificially low for years to come.

The US economy just isn't growing on its own yet…

And many fund managers seem to agree…

 

According to Vladimir Nedeljkovic, head of investments at Absa CIB, “What we have seen is people buying after the dip and the majority of the volume comes from a couple of institutional investors”.

In fact, the Absa New Gold ETF has seen trading volumes as high as R650 million in a single day, nearly ten times the average traded volume of R70 million a day…I for one believe we'll see a recovery in gold.

When is a difficult question. But just like the downside move happened in a quick, violent trading session I expect the upside move to happen just as quickly.

 

The market is now split between longs and shorts and they cannot both be right. 

Either the gold bulls - like in a game of tug-of-war - pull back and prompt the shorters to panic and buy back - or they do nothing, in which case the endless stories about the "end of gold" will see a steady further erosion in prices. 

At the end of the day it is a question of who has got the biggest guns - the shorts have made their play - let's see if there is any esponse from the longs to defend their position.

I for one am still holding on to my small cap gold shares, because with the current gold price and rand dollar exchange rate they are still attractive to hold.

 

My limit would be a gold price at $1,200. Below that things start falling apart…

 

Interesting article in FSP

[HDB]

and she just bust through with one mighty heave...

[HDB]

Massive tussle between Bears and Bulls @ 1399 in last 30 minutes

Bears not letting go...If she cant break watch it fall very quickly again!!!