What's Behind Gold's Recent Moves?
By Staff News & Analysis - July 12, 2010

Secret gold swap has spooked the market … It takes a lot to spook the solid old gold market. But when it emerged last week that one or more banks had lent 380 tonnes of gold to the Bank of International Settlements in return for foreign currencies, there was widespread surprise and confusion … The news that a mystery bank has just pawned the family jewels gave traders a jolt – nervous about the sudden transfer of almost 20% of the world's annual gold production and the possibility of a sell-off. … In a tiny footnote in its annual report, the bank disclosed its unusually large holding of gold, compared with nothing the year before. The disclosure was a large factor in the correction of the gold price this week, which fell below $1,200 for the first time in more than a month. Concerns hinged on whether the BIS could potentially sell on this vast cache of bullion in the event of a default, flooding the market with liquidity. – UK Telegraph

Dominant Social Theme: The gold market is a mystery and can't be trusted.

Free-Market Analysis: As we pointed out in today's other article, we may be reaching a point where the elite's attempts to continually reinforce dominant social themes actually begin to be counter-productive. This may be seen in recent downward moves by the gold market. There are plenty of reports, as usual, about pressures being brought to bear to slow the price progress of money-metals, especially gold. But given the general upward trend, we begin to wonder if the elite's attempts are analogous to putting a cork in a bottle – and then shaking. The result will eventually just be more explosive. The markets cannot, in this sense, be contained.

Certainly, what is clear is that the higher gold goes, the more unsettled trading will become. If gold ever gets to US$3,000 an ounce, we would anticipate a market with tremendous volatility. In fact, it is no coincidence that manipulations become more apparent and inevitable toward the end of a bull market – and gold and silver, too, are certainly in at least the middle stages of a bull market. What is also true about gold is that the power elite itself probably will not give up the fight, no matter how hopeless, when it comes to constraining the inevitable upward moves of both gold and silver. But this extends even beyond price control. The elite will inevitably use the soaring price of these money metals for other manipulative purposes. Here's some more from the article:

It appears to have raised $14bn for whoever's been doing the swapping – small fry on the currency markets, but serious liquidity in the gold market. Denominated in euros, gold has fallen 8% since the beginning of the month and is now trading at a seven-week low of €937 per troy ounce. The big gold exchange traded funds (ETFs) – having peaked at record inflows in May – have also been showing net outflows over the past few days. Meanwhile, economists and gold market-watchers were determined to hunt down which bank is short of cash – curious about who is using their stash of precious metals for what looks suspiciously like a secret bailout. At first it looked like the BIS was swapping gold with a troubled central bank. After all, the institution is the central bankers' bank and its purpose to conduct transactions with national monetary authorities. Central banks in the troubled southern zone of Europe were considered the most likely perpetrators.

All this of course is hearsay of one sort or another as central banks are not subject to disclosure agreements on these issues. But moves of this size will tease out reports from all over the world. This also has the purpose of making the gold market look "shady," which some may hope will slow its momentum as well. One such report making the rounds involves hedge-fund magnate John Paulson, who is under considerable pressure for his "role" in the shorting of "packaged mortgage derivative products." Paulson also happens to have made huge bets on gold, and it is perfectly possible that these have not gone down well with the powers-that be.

There's certainly smoke surrounding this subject, if no fire. Absolute Return+Alpha reports that John Paulson's $33 billion hedge fund is now substantially lighter in AUM courtesy of scared investors pulling $2 billion in redemptions out of Paulson's funds by the end of June. What is relevant is that this confirms our suspicions that gold's volatile moves in recent days may be driven in part not just by bank manipulations but by liquidations – perhaps those emanating from John Paulson's massive gold portfolio, including gold stocks.

If reports of $2 billion or more in redemption requests for Paulson's funds at the end of June are correct, then the recent plunge in gold and the weakness in gold equities that has occurred (all admittedly peculiarly in the face of the dollar's recent weakness) could certainly, at least in part, be explained by this one hedge fund being forced to liquidate various gold-related investments in order to meet redemption requests. Or perhaps certain powers-that-be felt that Paulson should lighten up a little bit. The idea, of course, would be that he should do so in a manner that is inconsistent with a logical liquidation strategy designed to maximize shareholder profits. Instead, such a liquidation was to be purposefully reminiscent of an attempt to pound the yellow metal over the head and create panic selling by others …

Either way, the gold plunge has taken its toll on sentiment as well. HGNSI (the Hulbert sentiment indicator) recently collapsed 14.3 points to just 9.2 percent, or just 9.2 points from indicating most gold timers are actually net short gold. The last time this sentiment index was this low was on August 28, 2009, which was just two days before gold rallied US$200 over the next three months. What is likely most painful to anti-gold powers-that-be, is that there are plenty of elements militating in gold's favor at this point in time despite whatever pressure can be brought against it. Chief among them is increasing pressure for further central bank money printing in both Europe and America.

There is also the specter of additional US military activities in Iran and elsewhere in the world. According to RawStory, "Costa Rica's Nacion newspaper reported last week that the new agreement will see 7,000 US Marines, supported by 200 helicopters and 46 warships, 'enter and leave the country at will.' A June 2 letter from Costa Rica to the US apparently stated that US troops will have "the right to carry out the activities it deems necessary in carrying out its mission."

Many in the gold community hadn't actually expected any sort of significant upside for gold and gold stocks until after the FOMC meeting in August, where presumably the Federal Reserve would indicate that it was returning to more money printing operations. But now it would seem there could be significant action in the gold market even before August, given what might be seen as artificial selling pressure.

After Thoughts

Our point here is that once again matters may be moving beyond the elite's ability to maintain control (see other article this issue). At the very least, it is ironic that, given the strength of the market, efforts to restrain the price of gold – whether by manipulation or intimidation – may only end-up reinforcing money-metal price appreciation.

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