Gold Manipulation Gone Bad

In this week’s letter, Ivan Lo talks about the all-out attack on gold, global stocks and why you need to be weary, the gold and silver buying frenzy, the world’s declining gold supply, and themajor changes taking place at

Dear Readers,

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An All Out Attack

It’s an all-out attack. Gold got smashed again on Monday, while terrorism runs wild.

While the media has everyone talking only of the recent attack on gold and the kid Bomber in Boston, no one has yet to talk about the tipping point for global stocks.

German stocks fell for a sixth day, their longest losing streak since November 2011, amid disappointing earnings statements from some of the nation’s largest companies. What was kept away from the media once again was the “flash crash” that sent the DAX down 180 points in just minutes. You can thank High Frequency Trading for that.

Why is that important to us?

American companies rely more than ever on their overseas markets. When the world struggles, the profits and earnings for American corporations will shrink.

Apple*, America’s poster child, broke the ‘magic’ $400 level last week for the first time in 16 months. That means Apple is down 43.5% from its ‘generational high,’ and anyone who bought the stock in 2012 is now fully submerged underwater…

(*After decades of Windows, I’ve finally made the switch over to Apple’s MacBook Pro…Gotta say I am impressed.)

Courtesy: Apple Inc.

Fear and Bull Markets: Not a Good Combination

I called for the S&P to rise past 1500 last year based on fundamentals (mainly cost cutting and increasing margins) combined with the Fed’s ability to artificially inflate asset prices. But the market is now at record levels – all in the midst of a struggling global economy.

The markets don’t always reflect the health of the economy, but it has historically given us a look into a future that is often 6-12 months forward. However, if the future doesn’t look as bright, the market can turn very quickly in order to establish that crystal ball. And the ball may no longer be as clear as history once taught us.

A Robots Game

The collective wisdom of investors that used to help gauge the sentiment of the economy based on expectations built into stock prices is no longer accurate.

Thanks to the power of manipulation.

Manipulation comes in many forms: it comes from the media’s ability to brainwash (people really do believe everything they see on TV); High Frequency Trading (HFT); Algorithmic Trading software; and government intervention in the open market. Their combination of can easily send markets to new highs without reason.

Examples of manipulation are evident every day.

Earlier in the week, both the S&P and the Dow were clearly breaking lower. But in the next day of trading, the software programs were ignited and the markets moved higher on very little support and volume, showing us that it’s not the retail market moving stocks up.

I can also tell you that there is something fishy going on in the Canadian markets, whereby stocks are forced downward by at least one of the major Canadian banks. It is blatantly manipulative and I will be working hard to uncover this story in the future.

A Broken Crystal Ball

The market’s ability to predict our future is no longer clear. It has been a year of straight gains in the market but we have yet to see any growth.

Since the Fed’s record breaking monetary injections five years ago, America has yet to see any real signs of growth. Period.

Just take a look at the featured video I posted this week, where Bespoke Investment Group’s Paul Hickey and Bloomberg’s Adam Johnson talk about what the Fed has accomplished through a simple chart.

The Turn of Something Big

The market may move higher, but don’t believe this bull will continue for much longer – especially with the amount of terror that is beginning to spread across America. Bull markets, war, and fear don’t mix. Goldman Sachs’ chief economist, Jan Hatzius, has been calling for a strong recovery since 2010.

And for the last three years, he’s had to revise many of those statements: His recent report showed no different, stating that the U.S. is still on a sluggish growth trend: “If real income grows 2-1/2%, this would mean real consumption growth of 1% to 1-1/2%. Combined with the likely weakness in federal spending, slow consumption growth would make it difficult for real GDP to grow much more than 2%, even if homebuilding and business investment continue to grow at healthy rates, as we expect. This reinforces our view that GDP growth in 2013 will still be relatively sluggish, with only a modest pickup late in the year.”

Bank of America’s Hans Mikkselsen also agreed:

…The current slowdown in the economy is clearly worse than expected at this stage…Moreover, on top of surprising domestic weakness we are faced with a number of important external risks such as those emanating from North Korea and Europe. Thus if stocks and credit are counting on the economy to pull through the near-term challenges they must believe strongly in an underlying more independent source of growth – such as the housing market recovery.

There is no housing recovery; thus, stocks and credit may not pull through the near-term challenges. Now here’s the kicker: Both of these banks issued big sell signals for gold a few weeks ago. When the economy is booming, gold stinks. But when the economy looks dismal and shows little signs of growth, gold is strong because it signals that the Fed will continue to push the pedal to the medal. In the last 10 of 12 years, the U.S. hasn’t had more than 3% GDP growth – a very poor track record for the nation. In order to achieve the anticipated growth rate, the Fed will have to print even more than they already have. And that means gold should be strong.

Gold and Silver Frenzy

Last week, I mentioned how hard it was to buy physical silver due to the shortage of physical silver in the market. With the recent drop in gold prices, it’s becoming just as hard to buy gold.

Running Out of Gold

The Hong Kong’s Chinese Gold & Silver Exchange Society, which has been in operations for over a century, has sold out of gold bullion, and is now waiting until Wednesday for shipments to arrive from Switzerland and London. Chinese citizens were scrambling to buy physical gold. And it wasn’t just the wealthy buying gold.

According to a Yangcheng Evening News reporter it was everyone from pork traffickers to fishmongers who dropped everything, including their jobs, to buy gold at the local malls. India was no different.

According to Bloomberg:

“Gold buyers in India, the world’s biggest consumer, are flocking to stores to buy jewellery and coins, betting a selloff that plunged bullion to a two-year low may be overdone.”

Via WSJ:

“Gold demand in India, the world’s largest consumer, surged Thursday as a collapse in its price coincided with one of the most auspicious days for the country’s majority Hindus to buy the yellow metal. People crowded jewellery shops since morning in Mumbai’s Zaveri Bazar area, a major bullion-trading hub, as gold became more affordable after a 12% price fall since Friday….

Sales in Mumbai, the main gold market in India, totalled 4 tons in the past two days alone, compared with average daily sales of about 1 ton during the January-March quarter, Bombay Bullion Association President Mohit Khamboj said. “We expect to sell around 3 tons today [Thursday]” on the occasion of Guru Pushya Nakshatra, he said.

Retailers in Zaveri Bazar said they have decided to extend their shopping hours until close to midnight Thursday. “We have not seen such strong demand in many years. Our order books are already 30%-40% more than last year’s festival day,” said Sohanlal Soni, owner of Ranuja Jewelers in Zaveri Bazar. “We don’t have enough staff to keep up with this kind of mad demand, so the only choice is to work longer today.”” In two days, gold sales in Mumbai alone totalled more than 4 tons…That’s nearly 30% of Cyrpus’ gold reserve

india gold buying
Photo: Basheer

Both Japan and Australia are loading up on physical as well: According to the Age:

“Gold sales from Perth Mint, which refines nearly all of the nation’s bullion, have surged after prices plunged, adding to signs that the metal’s slump to a two-year low is spurring increased demand. “The volume of business that we’re putting through is way in excess of double what we did last week,” Treasurer Nigel Moffatt said, without giving precise figures. “There have been people running through the gate.”

…The Perth Mint’s sales of gold coins climbed 49 per cent to 97,541 ounces in the three months ended March 31 from a year earlier.

…Meanwhile, reports of strong demand for physical gold are coming in from across the region. Physical dealers have noted a shortage in gold bars because of the demand, pushing up premiums for gold bars in Singapore and Hong Kong, Reuters said today.

…Japanese individual investors doubled gold purchases yesterday at Tokuriki Honten, the country’s second-largest retailer of the precious metal.” It’s not just happening overseas, it’s happening right here on our home turf.

According to data from the US Mint, a record 63,500 ounces, or a whopping 2 tons, of gold were sold on April 17th alone. That means sales for this month is now over 147,000 ounces; that’s more than the previous two months combined with the month barely over.

In Your Face Manipulator: Gold Manipulation

It would seem that the blatant attempt to slam gold has worked, but only temporarily. There still isn’t a fundamental reason why gold had one of its biggest drops in history this week. We already know Cyprus was a non-event for gold, especially since even Blackrock’s fund manager said that there was “no visible central bank activity” as gold price plunged. However, what we do know is that whoever decided to cumulatively attack gold, inadvertently created the opposite effect.

The efforts to slam gold have now bolstered a massive influx of physical purchases, leading to a purchase hysteria not seen since the last gold rush in the 70’s. It was only a few weeks ago that the big bankers such as Goldman Sachs and the Bank of America were issuing strong sell orders on gold.

But shortly after issuing sell orders, the Bank of America seems to have made a mistake:

“With prices now below $1,500/oz., we expect a pick-up in jewellery demand in the medium term and see considerable pain for the gold miners should prices dip below $1,200/oz. As such, we believe the downside to gold prices may be limited to an additional $150/oz. In fact, we estimate that jewellery demand may become so pronounced by 2016 that prices could trade above $1,500/oz. even if investors remain net sellers. Looking at sensitivities from a different angle, investors would need to buy merely 600t of gold to sustain prices at $2,000/oz. by 2016, compared to non-commercial purchases of 1,798t in 2012.”

In short, they’re saying that the disconnect between the paper sell-off and physical buying spree can only last so long before gold shoots right back up to $2000 as the surge in buying overwhelms the paper selling. Furthermore, it seems that they have finally agreed with me on the fact that the Cyprus gold sale was meaningless, as I mentioned last week:

“Cyprus’ announcement to sell nearly 14t of gold reserves was a key trigger behind the recent collapse in gold prices, as it raised concerns that other peripheral nations may follow suit. Given our estimate that every $45/oz. represents a net sale of 100t, the move over the last two days would suggest net sales of 480t, or about 20% of yearly mine supply. In short, the market seems to have discounted the combined future gold sales of Portugal and Greece. As we believe additional gold selling in the European periphery is highly unlikely, we find it hard to fully justify the sell-off.”

The manipulators have made such a big deal about gold’s fall that the retail audience is starting to take notice…

Less Supply, More Demand

If gold continues at these lower price levels, we’re going to have a major shortage of gold, as many producers cannot make enough money to continue production. I am surprised that with gold’s recent decline, no one has talked about the decline in gold production. The recent drop in price is forcing many players, big and small, to suspend or shut down gold mining operations.

Two of the world’s biggest gold producers, Barrick Gold and Newmont Mining, have calculated their all-in cash costs at roughly $1000-1100 per ounce and $1192/oz. respectively. However, analysts project all-in cash costs for the two big miners at $1650/oz. That means gold production by two of the world’s biggest gold producers cannot be sustained with such low gold prices. Take a look at this video:

Meanwhile, Rio Tinto’s Bingham Canyon, a mine that produces around 400,000 ounces of gold and nearly 3 million ounces of silver a year as by-products of copper mining, had a massive landslide that may put the mine out of commission for up to twelve months, and several years before the mine is back up to full operating capacity. That means another decline in gold output this year.Furthermore, Barrick’s Pascua-Lama, which is expected to be one of the world’s largest, lowest cost mines with nearly 18 million ounces of proven and probable gold reserves and 676,000,000 ounces of silver contained within, was just put on halt by the Chilean government. This halt, due to environmental and social concerns, may take years to resolve; thus, limiting the world’s anticipated gold production .

Bingham Landslide

Can gold fall further? Let’s see if paper can overrun the demand of the physical. I bet it’s going to be very hard to force gold down further…


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Ivan Lo

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