What on Earth's Going on in the Gold Market?


"Virtually everything that is happening in the global economy suggests that the gold price should be rising, and probably rising fast, yet it has been unable to move out of a trading range of $1680–1750, and every time it nears the top of this range it gets knocked back again."


The gold market has been denying all logic. Virtually everything that is happening in the global economy suggests the price should be rising—and probably rising fast, yet it has been unable to move out of a trading range of between around $1,680–1,750/ounce (oz). And every time it nears the top of this range it gets knocked back again. It certainly has made some weak holders pull out of the gold market altogether, while other half believers are beginning to find the call from gold experts that they should use the dips as buying opportunities frustrating to say the least—and they may fall out of the market too.

It's actually interesting to look at the chart of the gold price running back 10 years or so:


Chart courtesy World Gold Council, www.gold.org

There is seemingly a strong similarity between the pattern to the setback in the gold price in late 2008 to that today (including the percentage of the pullback) although today's is so far a little more prolonged—and look what happened in between. There was also a similar pullback discernible from the above chart back in 2006.

The more circumspect gold bulls all predict that there will be setbacks in a continuing upward path. Typical of an ongoing bull market. Those who say the gold price chart suggests a bubble waiting to burst don't seem to know much about bubbles. The only way the gold price could burst downward in a bubble-like phenomenon is if all the world's Central Banks got together and decided to demonetize gold and sell all their holdings, creating a glut of immeasurable proportions. It is not in the banks' interests to do so given that gold constitutes such a huge part of the foreign exchange holdings of a number of nations which would have to be key to such a decision. Gold is actually too far ingrained into the financial system for this to happen.

Failing that, the ever-rising cost of producing an ounce of mined gold mean that the price downside is pretty limited in any case. It is, on average, probably around $1,100+ an ounce (ignore a mining company’s cash cost figures—they are mostly just paper figures taking little or no account of the capital costs—initial and ongoing—involved in a mine’s development and operation), which means that many producers are probably only marginally profitable even at current price levels. Take their production off the market and the supply/demand balance changes dramatically and prices would quickly recover.

But we digress. What is actually keeping the gold price down? Respected analyst Chris Martenson puts it thus in a note to his followers: "As I noted in the run-up to the QE4 announcement and then in the days right after, some entity has been selling literally thousands and thousands of gold contracts into the thinly traded overnight markets so rapidly that we have to use millisecond charting to see it for what it is. Again, there is no other legitimate explanation for this activity of which I am aware besides having an intent of pushing the price down.

"Whether there is some motivation for this activity besides making money, I remain convinced that the gold market, like many others, is no longer sending useful price signals. Instead it is telling us that some entity has found it useful to sell thousands of gold contracts all at once.

"The interesting part of this story is that this has been the most sustained, intensive and yet ineffective gold-selling that I have yet seen. In the past, such bear raids, as they are called, would have resulted in a sharply lower gold price. Right now, that has not yet really happened."

Indeed, given the amount of paper gold futures that have been sold, those doing the selling must be wondering how long they can keep this up given they have only managed to knock the price back a few percent. The volume trades, seemingly designed to drive the price down below various stop-loss positions and thus make the falls self-perpetuating in these days of computer-driven trading, are patently only succeeding in taking the price down to another point where perhaps an even bigger position holder is buying. The finger tends to point at China in this respect, given a number of statements from various senior officials suggesting that a) China needs to increase its reserve holdings b) that it is buying on dips and c) that it needs to keep the population happy and has been in the persuasion business of telling its rapidly growing middle classes that gold and silver are great assets in which to invest.

This should all be a positive sign for gold’s future advance—it just depends how long the heavy paper gold sellers can keep up their fight to drive the gold price down, and their motives. Could be they are pushing the price down to buy back at lower levels, then will let the price rise, sell at a profit and start the procedure all over again, although others, notably GATA and its followers, ascribe more sinister motives to the manipulation—for manipulation it surely is.

Overnight last night, the gold price struggled back above the $1,700/oz level yet again. It could take another hit today, but the news out of Japan that the incoming new government plans its own version of QE to infinity and inflate the Japanese economy after years of stagnation and deflation, could be gold positive, although the Bank of Japan will surely resist such a move strongly.

As we have noted before, all the signs suggest a continuing climb in the gold price as long as the U.S. market shenanigans are brought to a close. As Chris Martenson puts it, "I am wondering if a big up move is not right around the corner for gold. I can tell you that if even one fourth of the recent QE effort was announced five years ago, markets would have exploded and gold would have absolutely launched. . . "

Lawrence Williams

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