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GOLD: WHY NO PRICE RISE COMMENSURATE WITH CENTRAL BANKS’ BUYING?

By Mark Rogers

At the Money Week annual conference (held at Queen Elizabeth II Conference Centre, Westminster, London, Friday, 17 May, 2013), two of the speakers, Mr Dominic Frisby and Mr Simon Popple were asked the same question: was the drop in the gold price in April manipulated, and if so by whom and why? Both speakers disdained conspiracy theories as the likely answer: nothing but fruitless speculation. Mr Frisby asserted that we deal with the cards as they are on the table. Another question was however a good and intriguing one. Why is the price still down given that central banks have been buying “hand over fist”?

ETFs

As I noted in “Gold in Flux”, the main cause of the drop in price was the sudden dumping of huge quantities of paper gold. If this was because those who held these paper stocks had suddenly come to realise that they were worthless, then this was a rational thing to do, in spite of the fact that it would drive the price of gold down. Indeed, at the conference Mr Frisby pointed out that as long as the next crisis is held at bay, or indeed that the present crisis is bottoming out (he was ruefully cautious as to whether this is indeed what is happening!), then it would be reasonable to say that the current price of gold is a fair one. After all it is still high, in comparative historical terms: in 2009 it was $950 an ounce.

This does not, however, address the possibility that the price of gold has over the last year been too low. I first discussed the possibility in “The Price of Gold”. Why might it be considered that the price has been low? Those wretched ETFs. The swelling mass of ETFs had become so much papier-mâché (literal meaning: chewed paper), clogging the market. This might have had the effect of keeping the price lower than it otherwise would have been. Equally, of course, it could have kept the price artificially high.

As previously mentioned in “The Price of Gold”, the probability that the central banks’ buying of gold has been spurred by Basel III is a reasonable inference, whatever else may have caused it, though of course it does not answer the question about why the price continues low (subject to Mr Frisby’s caveat.) In passing, it is interesting to note that unlike European central banks, China did indeed start compliance with Basel III rules on January 1, 2013, when they ostensibly came into force.

DRAG ON THE PRICE

Now it is entirely plausible that the ETFs continue their drag on the price of gold: ETFs have not been abolished or abandoned, merely that a large quantity have been dumped. And the price of gold therefore inevitably mixes (perhaps confuses is the better word) physical gold and paper gold.

Clif Droke quotes Bill O’Neill, principal with LOGIC Advisors: “The biggest negative continues to be the ETFs. We’ve had steady and constant ETF liquidation,” adding that many suspect the exodus is not over, and continuing: “Further, once major hedge funds rotate away from such an asset, they typically don’t jump right back in anytime soon. The big players are going to be slow coming back into the market.”

Mr Droke comments: “The unspoken reality for gold investors is that the increasing institutional demand for equities is taking the wind out of the sails of the gold market,” and goes on to quote Kitco News on Tuesday, 14 May, 2013: “Continued exchange-traded-fund outflows, strong equities and US dollar gains are limiting the upside for gold, while recently strong physical demand and continued central-bank accommodation are providing support.”

Mr Droke elaborates: “While there has been strong demand for physical bullion since the April lows, especially in Asia, the fact that stocks are garnering an ever-growing share of ‘hot money’ flows while gold is largely ignored by institutional and hedge fund investors isn’t helping the yellow metal’s cause.

“Moreover, as the value of S&P 500 Index increases while gold goes nowhere, it’s causing the relative strength for gold to actually decline. This gives the hedge fund and other sophisticated investors who look at technical indicators one less reason to invest in gold in the near term.

“Kitco reports, ‘A number of observers have cited the rotation into equities as one of the factors prompting an exodus out of gold exchange-traded funds so far this year….’”

This seems to be a very acute analysis of what is happening.

Another complicating factor is that while central banks are indeed buying up gold, some of the most important are continuing with, or continuing to threaten, more quantitative easing. This is another paradox waiting to be resolved, for as described in the Deutsche Bank, London Head Office analysis “Gold: Adjusting to Zero” (discussed in “Gold and the Keynesian Groupies”) QE pushes the price up, or is there some Mephistophelean spell that negates the gold price when it is central banks which buy it? (See “The Gold Standard: Further Encouragement from Wise Eminences”)

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

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Thoughts
"For a mountaineer, the important things are the effort, the posture and the muscles. The rope that holds him serves no purpose when everything works but it gives him a sense of security. In the same way, all gold does is ensure confidence; it's a safe haven."