Why is gold unconcerned?

[pianodoctor]

I don't think I need to link to a news story here- we all know what the news is saying- drama, drama, drama about the U.S. debt showdown.

But for all the supposed danger, gold seems to be unconcerned. Not doing much of anything. The question is why?

Hypothesizing possibilities:

1. Mr. Market correctly susses this is no big deal.
2. Market manipulation has been effective in counteracting large moves.
3. Wall Street isn't interested in a 'flight to safety' trade at this time. They're pushing stocks. Central banks are wait-and-see. The rest of us are not enough to really move the market.
4. Mr. Market is an idiot.

Anyone have a supportable theory as to why the gold market apathy? Or other guesses?

[DSpencer]

Re: Why is gold unconcerned?

Good question. One possibility is that people are not sure what to expect even assuming the debt showdown really does become a big deal. Will there be a recession that brings down the price of gold? A currency crisis that raises it? Will the government find a way to print their way out of it (the trillion dollar coin idea)?

[coolhand]

Re: Why is gold unconcerned?

I don't think I need to link to a news story here- we all know what the news is saying- drama, drama, drama about the U.S. debt showdown.

But for all the supposed danger, gold seems to be unconcerned. Not doing much of anything. The question is why?

Hypothesizing possibilities:

1. Mr. Market correctly susses this is no big deal.
2. Market manipulation has been effective in counteracting large moves.
3. Wall Street isn't interested in a 'flight to safety' trade at this time. They're pushing stocks. Central banks are wait-and-see. The rest of us are not enough to really move the market.
4. Mr. Market is an idiot.

Anyone have a supportable theory as to why the gold market apathy? Or other guesses?

I don't think gold is apathetic at all...GLD lost another 11 tons of gold (1.5% of its inventory) in the last 4 trading days...where'd it go? And today, GOFO rates on the LBMA went negative across 1, 2 & 3-mth durations for the 1st time since early Sep.

A supportable theory on why gold is doing what it's doing? The "price" of gold is not the price of gold. It is the price of derivative gold, levered as much as 100x to 1. So the fact that gold derivative prices have fallen from $1900 to $1200 since the 1st US debt ceiling while at the same time, global physical gold supplies are massively shrinking (GLD inventory down 35% YTD while Sprott ETF inventory down 1.5% YTD...HMmmm?) tells you that there is a serious problem brewing in the global gold derivative markets THAT THE US & UK USE TO MAINTAIN THE USD'S RESERVE STATUS.

Here's another way to look at what gold is telling us, which is that the USD's reserve status is not only wavering, it has been steadily wavering since Sep-2011, when at $1900, Venezuela started the run on physical by asking for their gold back...the run keeps accelerating...if you understand gold markets, you should be very excited to see the "price" of gold derivatives fall while the supplies of physical drop...far from telling you that you are wrong, it is SCREAMING that holders of physical gold are dead right...if they have the understanding & patience to hold on for the painful drop ("gold derivative" prices are going lower, a lot lower, in all likelihood. Can you hold your physical as "gold prices" go thru $1,000, through $800? Can you step up & buy more?)

Think about it this way:

“Quoted gold prices are like a coat check room at a nice hotel. Imagine over time it develops that there are 60-100 coat check tickets for every coat in the coat room. If the insiders that ran the coat room suddenly realized that the value of coats was much greater than the quoted price [say for example, they begin to realize the coats are used to settle a rising % of global trade at an implied price significantly higher than today’s price? J ], what should happen? The supply of physical coats should fall & the “price” of coat check tickets should fall as well as insiders realize that with 60-100x leverage, 59-99% of the coat check tickets are actually WORTHLESS because there aren’t coats to back them.”

“Think about the bank run on George Bailey’s bank in ‘It’s a Wonderful Life.’ How many people get 100% of their deposit claim checks? Only one, right? Everyone else that wants immediate access to their claim check takes a BIG haircut to ‘face value’ of that claim. What you are watching in gold markets is a slow-motion version of a classic bank run on a highly-levered depository.”

[fengguo1]

Re: Why is gold unconcerned?

:

1. Mr. Market correctly susses this is no big deal.
2. Market manipulation has been effective in counteracting large moves.
3. Wall Street isn't interested in a 'flight to safety' trade at this time. They're pushing stocks. Central banks are wait-and-see. The rest of us are not enough to really move the market.
4. Mr. Market is an idiot.

Anyone have a supportable theory as to why the gold market apathy? Or other guesses?

The flight to safety is on. Except safety is increasingly perceived to exist in the Teflon coated Stock market. Confidence is gradually shifting from public assets (US10yr at 1.5%) towards private assets like stocks. The inflation trade is dead, gold isn't going anywhere without Indian buyers.

[Woodsman]

Re: Why is gold unconcerned?

Confidence is gradually shifting from public assets (US10yr at 1.5%) towards private assets like stocks.

Martin Armstrong agrees with you.

[GRG55]

Re: Why is gold unconcerned?

...Anyone have a supportable theory as to why the gold market apathy? Or other guesses?

The world as we know it isn't going to end any time soon (despite the views of some others here).
The next crisis might be years away.
We seem to be in the Ka (disinflationary) part of the cycle.

I can't come up with any good reason to hold anything more than a modest insurance policy level of gold right now.

[coolhand]

Re: Why is gold unconcerned?

The world as we know it isn't going to end any time soon (despite the views of some others here).
The next crisis might be years away.
We seem to be in the Ka (disinflationary) part of the cycle.

I can't come up with any good reason to hold anything more than a modest insurance policy level of gold right now.

Last night, GLD lost another 4 tons of gold, or 0.5% of its total inventory. That's 15 tons of gold out of GLD (nearly 2% of inventory) in the last 5 trading days. 15 tons is ~$625m...someone big just keeps stockpiling physical while 99% of gold market observers fret about the drop in gold derivative prices.

Stocks should rise in price...the world has seen this movie before, Americans not so much. "Flight to safety in stocks" despite worsening economic fundamentals is called something else in most of the world...early stages of a currency crisis.

GRG55 you are exactly right that the next crisis could be years away. Of course, all of the pieces are in place for a crisis tomorrow...and it's all a political decision of when it occurs...and the decision will be made by China, not the US (when does China get sick of pegging the yuan to the dollar given our shenanigans.)

This week, Chinese exports FELL y/y, while their GDP is expected to accelerate through the end of the year. Very few commentators have commented on the significance of this - every day going forward, China is less dependent on exports than they are on internal consumption for GDP growth...while staying pegged to the USD during QE is leading to accelerating food inflation in China.

How long will China continue to use the USD as reserve currency & peg to it given the above? To your point GRG, maybe years. Maybe days. Who knows. We do know that they are buying basically 100% of global gold mine supplies and not buying USTs...and their officials are publicly trying to move away from US debt...

IMO, it is very difficult to trade the end of a currency system...esp when the new one IMO is going to lead to a massive re-pricing in gold...the more gold derivatives drop in price while inventories keep dropping, the happier I am b/c it means we are that much closer to a reset that is going to shock most people w/how high gold is repriced, IMO...

[coolhand]

Re: Why is gold unconcerned?

Last night, GLD lost another 4 tons of gold, or 0.5% of its total inventory. That's 15 tons of gold out of GLD (nearly 2% of inventory) in the last 5 trading days. 15 tons is ~$625m...someone big just keeps stockpiling physical while 99% of gold market observers fret about the drop in gold derivative prices.

Stocks should rise in price...the world has seen this movie before, Americans not so much. "Flight to safety in stocks" despite worsening economic fundamentals is called something else in most of the world...early stages of a currency crisis.

GRG55 you are exactly right that the next crisis could be years away. Of course, all of the pieces are in place for a crisis tomorrow...and it's all a political decision of when it occurs...and the decision will be made by China, not the US (when does China get sick of pegging the yuan to the dollar given our shenanigans.)

This week, Chinese exports FELL y/y, while their GDP is expected to accelerate through the end of the year. Very few commentators have commented on the significance of this - every day going forward, China is less dependent on exports than they are on internal consumption for GDP growth...while staying pegged to the USD during QE is leading to accelerating food inflation in China.

How long will China continue to use the USD as reserve currency & peg to it given the above? To your point GRG, maybe years. Maybe days. Who knows. We do know that they are buying basically 100% of global gold mine supplies and not buying USTs...and their officials are publicly trying to move away from US debt...

IMO, it is very difficult to trade the end of a currency system...esp when the new one IMO is going to lead to a massive re-pricing in gold...the more gold derivatives drop in price while inventories keep dropping, the happier I am b/c it means we are that much closer to a reset that is going to shock most people w/how high gold is repriced, IMO...

*I should correct the above to "not buying more UST's" - China's UST holdings have been flat for nearly 3 years now...the Fed not so much.

[FrankL]

Re: Why is gold unconcerned?

first of all, I'm not anti-gold. But let's dissect some of the arguments here, which I also see posted on gold-bug sites such as (fo)(fo)(fo)(fo)a.

I don't think gold is apathetic at all...GLD lost another 11 tons of gold (1.5% of its inventory) in the last 4 trading days...where'd it go? And today, GOFO rates on the LBMA went negative across 1, 2 & 3-mth durations for the 1st time since early Sep.

There were periods where GLD gained a lot of gold in its inventory. Is there a reason why that happened that is the opposite of why you claim this recent decline happens?

We've seen these negative GOFO rates before, I haven't seen a good explanation why it should have great significance.

A supportable theory on why gold is doing what it's doing? The "price" of gold is not the price of gold. It is the price of derivative gold, levered as much as 100x to 1. So the fact that gold derivative prices have fallen from $1900 to $1200 since the 1st US debt ceiling while at the same time, global physical gold supplies are massively shrinking (GLD inventory down 35% YTD while Sprott ETF inventory down 1.5% YTD...HMmmm?) tells you that there is a serious problem brewing in the global gold derivative markets THAT THE US & UK USE TO MAINTAIN THE USD'S RESERVE STATUS.

Gold also fell a lot before 2001, did that also signify that the UK and the US were manipulating the derivatives market to maintain the USD status in that period? Is the only way GLD can shed gold through liquidation of buckets of shares by shareholders? Or are the custodians reducing the size of their inventory because less people are interested in trading GLD since the recent fall in price?

Here's another way to look at what gold is telling us, which is that the USD's reserve status is not only wavering, it has been steadily wavering since Sep-2011, when at $1900, Venezuela started the run on physical by asking for their gold back...the run keeps accelerating...if you understand gold markets, you should be very excited to see the "price" of gold derivatives fall while the supplies of physical drop...far from telling you that you are wrong, it is SCREAMING that holders of physical gold are dead right...if they have the understanding & patience to hold on for the painful drop ("gold derivative" prices are going lower, a lot lower, in all likelihood. Can you hold your physical as "gold prices" go thru $1,000, through $800? Can you step up & buy more?)

Who can give a good argument that the current leverage of the gold derivative is not perfectly fine? Most people in this market don't want to take delivery, they just want to speculate/gamble with the price of the derivative. Like people who put money in other fractional reserve systems, such as a bank account that is insured by the FDIC, GLD and other derivatives are guaranteed to be settled in USD in case of a default. I'm claiming that they probably very well know the difference between the metal and the paper they hold. They are ok with it and play along.

Even if the FED was manipulating the gold (derivative) price, they are not stupid. If reserves really would get depleted too fast to be sustainable, they can create a short-lasting deflationary period where people will need to liquidate their holdings which causes prices to collapse further, causing even more people to have to liquidate. That should free up loads of gold too.

Think about it this way:

“Quoted gold prices are like a coat check room at a nice hotel. Imagine over time it develops that there are 60-100 coat check tickets for every coat in the coat room. If the insiders that ran the coat room suddenly realized that the value of coats was much greater than the quoted price [say for example, they begin to realize the coats are used to settle a rising % of global trade at an implied price significantly higher than today’s price? J ], what should happen? The supply of physical coats should fall & the “price” of coat check tickets should fall as well as insiders realize that with 60-100x leverage, 59-99% of the coat check tickets are actually WORTHLESS because there aren’t coats to back them.”

“Think about the bank run on George Bailey’s bank in ‘It’s a Wonderful Life.’ How many people get 100% of their deposit claim checks? Only one, right? Everyone else that wants immediate access to their claim check takes a BIG haircut to ‘face value’ of that claim. What you are watching in gold markets is a slow-motion version of a classic bank run on a highly-levered depository.”

in case of a default, contracts can be settled in USD. I'm willing to wager that most people buying gold derivatives are doing this for speculative purposes, not as an insurance against a USD collapse (where being settled in USD is not good).

Look, I wish you're right and my counter-arguments are all completely flawed. See this post as an invitation to debunk this line of reasoning..

[coolhand]

Re: Why is gold unconcerned?

first of all, I'm not anti-gold. But let's dissect some of the arguments here, which I also see posted on gold-bug sites such as (fo)(fo)(fo)(fo)a.



There were periods where GLD gained a lot of gold in its inventory. Is there a reason why that happened that is the opposite of why you claim this recent decline happens?

We've seen these negative GOFO rates before, I haven't seen a good explanation why it should have great significance.



Gold also fell a lot before 2001, did that also signify that the UK and the US were manipulating the derivatives market to maintain the USD status in that period? Is the only way GLD can shed gold through liquidation of buckets of shares by shareholders? Or are the custodians reducing the size of their inventory because less people are interested in trading GLD since the recent fall in price?



Who can give a good argument that the current leverage of the gold derivative is not perfectly fine? Most people in this market don't want to take delivery, they just want to speculate/gamble with the price of the derivative. Like people who put money in other fractional reserve systems, such as a bank account that is insured by the FDIC, GLD and other derivatives are guaranteed to be settled in USD in case of a default. I'm claiming that they probably very well know the difference between the metal and the paper they hold. They are ok with it and play along.

Even if the FED was manipulating the gold (derivative) price, they are not stupid. If reserves really would get depleted too fast to be sustainable, they can create a short-lasting deflationary period where people will need to liquidate their holdings which causes prices to collapse further, causing even more people to have to liquidate. That should free up loads of gold too.




in case of a default, contracts can be settled in USD. I'm willing to wager that most people buying gold derivatives are doing this for speculative purposes, not as an insurance against a USD collapse (where being settled in USD is not good).

Look, I wish you're right and my counter-arguments are all completely flawed. See this post as an invitation to debunk this line of reasoning..

GLD inventories rose from 2004-2013, pretty much straight up. Where did it come from? Bullion bank pooling inventories & scrap sales (Ever wonder who the "We" in "We Buy Gold" was?)

GOFO has been negative 3x in 30 yrs (now 4x). Fall 1999 for 2 days around Washington Agreement (Brown's Bottom, where one or more banks nearly collapsed, per the UK); fall 2008, when one bank did & several more banks nearly did collapse); July -Sep 2013, & the last 2 days - during which time widely expected "QE taper" couldn't even be achieved...Those dates are significant IMO.

Gold rose in the 1970s b/c the dollar nearly collapsed. The US had incipient hyperinflation. That ended when US took rates to 15%. That made the dollar strong & usable in foreign markets. That isn't going to happen again this time - 6% rates to stem inflation/attract investment would take interest expense over $1T/yr.

Your question about GLD inventory misses my point - the ETF is price x holdings. Gold went down 25%, Sprott's inventory basically didn't budge, GLD run by bullion banks collapsed nearly 40% YTD...why?

"Most people don't want to take delivery of their gold." Historically true. China has taken down nearly 100% of physical mine supply last 6 months. Close to 2,000 tons last 24 months. Germany wants their gold back. Venezuela wants their gold back. Indonesia, Vietnam, India - everywhere there is growth, people want to settle in gold. Can't look at western gold markets through western eyes. Look through eastern eyes. This mismatch of western derivative prices & eastern physical settlement is creating big problems now that east is majority of the world's economy & growing faster.

Fed is & isn't stupid. Setting aside that their public pronouncements about every major economic event in the last 10 years has been dead wrong, they can easily get out of this. Everyone that holds gold futures or spot contracts or GLD - you get settled in cash at yesterday's trades. If you have physical, China's now making that market in Shanghai...at a big #.

[charliebrown]

Re: Why is gold unconcerned?

I hear this paper vs. physical argument a lot. So why can I go to APMEX and buy a 1 kilo bar for $21 per oz over spot?
Now I am aware that a central bank cannot call apmex and buy a ton of gold. This disparity may only be the big boys.

I am sort of with GRG on this. The end is coming, but unless there is some massive black swan like war, natural disaster, etc. The "can" can be kicked down the road for another decade or so. Decade old ratios like stocks / gold, gold/oil show that gold may be slightly undervalued here, but not screamingly so like in 2000.

If you have substantial savings and do not have a core gold position, I would accumulate here.

[DSpencer]

Re: Why is gold unconcerned?

I hear this paper vs. physical argument a lot. So why can I go to APMEX and buy a 1 kilo bar for $21 per oz over spot?
Now I am aware that a central bank cannot call apmex and buy a ton of gold. This disparity may only be the big boys.

I am sort of with GRG on this. The end is coming, but unless there is some massive black swan like war, natural disaster, etc. The "can" can be kicked down the road for another decade or so. Decade old ratios like stocks / gold, gold/oil show that gold may be slightly undervalued here, but not screamingly so like in 2000.

If you have substantial savings and do not have a core gold position, I would accumulate here.

I'm also very confused by this argument. Wouldn't the implication be that someone could sell physical for a premium price? That doesn't seem to be the case.

[jpatter666]

Re: Why is gold unconcerned?

I hear this paper vs. physical argument a lot. So why can I go to APMEX and buy a 1 kilo bar for $21 per oz over spot?
Now I am aware that a central bank cannot call apmex and buy a ton of gold. This disparity may only be the big boys.

I am sort of with GRG on this. The end is coming, but unless there is some massive black swan like war, natural disaster, etc. The "can" can be kicked down the road for another decade or so. Decade old ratios like stocks / gold, gold/oil show that gold may be slightly undervalued here, but not screamingly so like in 2000.

If you have substantial savings and do not have a core gold position, I would accumulate here.

I agree as well. My gold is insurance against a *disorderly* unwinding of dollar reserve status.

I remember when the deficit crossed the *1* trillion mark and everyone said it was a harbinger of the end. As we've seen, these things can drag out far longer than you'd reasonably suspect.

And honestly, if and when it does occur, I'm not looking forward to it. Be careful what you ask for and that old Chinese curse "May you live in interesting times".