The Debate on Gold Infiltrates the Mainstream

What was that? Was it a pre-non-farm payrolls leak that will tomorrow confirm the Fed has no intention of ‘tapering’ its asset purchases just yet? We don’t know, but something moved the market abruptly around lunchtime in New York.

The Dow Jones Industrial Index was trading down by 114 points, European exchanges were heavily in the red and Slipstream TraderMurray Dawes tells us that at one point, the Nikkei futures were down 500 points!

Then Europe closed for the day and the US began to rally. The Dow Jones finished the day up 80 points. Tomorrow sees the release of the non-farm payrolls report, a heavily traded data release that provides insight into the health of the employment market. A weaker than expected report could reassure the market that the Fed will remain active in supporting asset prices, providing confidence to speculators who are there for a good time, not a long time.

So maybe the midday turnaround came on whispers (or just hopes) that the jobs report will be weaker than the 165,000 gain expected. Or maybe not. Who knows what the Fed is going to do from one day to the next…the Fed certainly doesn’t.

On the subject of rumours and conspiracies, it’s interesting to see that the debate on gold is infiltrating the mainstream press by knowledgeable sources. Most mainstream reporting on gold is laughable, but in today’sFinancial Review, veteran columnist Pierpoint, aka Trevor Sykes, does a pretty good job in explaining the gold price shenanigans of mid-April.

He points out the coordinated bearish reports from the big investment banks in the lead-up to the crash, the huge sell orders in the futures markets which set off massive stop-loss selling…and the fact that most of the selling occurred in the derivatives, rather than the physical market.

But he gives a little too much credence to the story that the London bullion market trading platform froze during the crucial trading day of Friday, 12 April when the gold price plunged. That claim was challenged pretty clearly here

He also errs in thinking the European Central Bank (ECB) is printing money in ‘astronomical’ quantities and that along with the Fed, has ‘strong motives’ to push the price of gold down.

No they are not and no they don’t. The ECB has a very different monetary ideology than the Fed. Over the past year, its balance sheet has shrunk 15%. It holds gold as an asset on its balance sheet and marks it to market every quarter. So a rising gold price is beneficial to the ECB.

The Fed on the other hand, values its gold at $42.22 per ounce on its balance sheet.

Apart from that though, Pierpont does a good job in pointing out the coordinated bear raid that took place on gold in April. No doubt a lot of traders (and the investment banks they work for) made a lot of money out of the raid. And many other smaller players got taken to the cleaners.

But if you look at the gold price in Aussie dollar terms, it’s nearly back to the levels it was pre the bear raid. The chart below clearly shows the mid-April plunge. Since then, a recovering US dollar gold price and a sharply weakerAustralian dollar combined to see Aussie dollar gold recover all of its losses. It’s probably due for another little pullback, but judging from this chart, the raid, as the name implies, was a surprising and short affair. 

Aussie Dollar Gold — the Crash and the Bounce


Anyway, Pierpoint, in our view correctly, concludes:

The way Pierpont reads the game, Comex and London are setting the world gold price on a paper basis, with relatively little physical gold to back their positions. On the other side, the Asian economic powerhouses are increasing their stocks big time…

Economic powerhouse? China? Well, yes, there’s no doubt that it is. And there’s no doubt that it’s trying to hedge its huge exposure to the US dollar and US Treasuries by buying up as much gold as it can without rocketing the price higher.

But they have their own problems, as we’ve pointed out many times before. You can read about how these problems will affect the Aussie economy here.

But the CEO’s of the world’s biggest China dependent companies don’t seem too concerned about China’s coming credit crunch and economic slowdown.

The Sydney Morning Herald today reports that 14 top business leaders, including BHP’s Andrew Mackenzie, attended a ‘Global CEO Advisory Council’ in Beijing earlier this week, hosted by Premier Li Keqiang. According to Mackenzie, Li was ‘extremely reassuring about the demand for resources’.

That’s good to know…and laughable. To believe that the captains of global capitalism are now dining with the king of the communists to seek guidance and reassurance about their businesses just goes to show how warped this system has become.

There was a time — when capitalism was in the ascendency — that distrust of communism and communists was standard fare. Now, the capitalists need the communists as they are about the only source of marginal new demand.

But for how much longer? As we keep saying, China’s credit bubble, the one that has enabled and sustained such strong demand for just about everything over the past few years, is winding down. The challenge will be to ensure it doesn’t quickly turn to bust.

Is it an impossible challenge? Well, the history of bubbles suggests their aftermath defies management or containment. In China’s case, history is about to provide us with another example.

Greg Canavan 
for The Daily Reckoning Australia