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Cause and effect. Everyone knows what the effect was on gold following the April 2013 mini-crash but there has been considerable debate about what caused it. On the surface, it was simple. Someone offered for sale on the NY COMEX open some 400 metric tonnes (12.86 million troy ounces) on April 12, 2013 causing the price of gold to fall 15.5% in two days from the $1,564 close on April 11, 2013. Since then gold has fallen further to a low thus far of $1,183 on June 28, 2013.

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

The reason or cause of why gold fell was many and varied. Gold was in a bubble; gold is not money and it is finally being recognized (ignoring the fact that gold is a core holding for central banks reserves); gold is a barbarous relic that is finally being sent to the dustbin of history where it belongs; central banks are going to sell their gold; inflation is moderating so there is no need for gold anymore; interest rates are going to rise making holding gold not necessary; QE is going to end so there is no need to hold gold; and, the stock market is offering a better return so there is no need to hold gold. Did I miss any?

Trouble is most of these arguments have been around for quite a while and many were used as the reason as to why gold would crash even as it rose from $250/ounce to $1,900/ounce from 2001 to 2011. Yet even at this reduced price gold remains up 400% from its 2001 lows while the stock market has barely broke even in the same period (S&P 500 topped at 1,552 in 2000 and today sits at 1,615).

So is there a cause out there that makes any sense? Dr. Paul Craig Roberts a former Assistant Secretary of the Treasury official in the Reagan administration and an author of Reaganomics has contended that the Federal Reserve engineered the collapse. Roberts believes that the LIBOR scandal, the currency setting scandal and other banking scandals are signs that the central banks of the US (Federal Reserve) and the UK (BofE) are aligning themselves with the interests of the large US and UK banks. Dr. Roberts has also spoken extensively about possible manipulation in the gold market. The LIBOR scandal and the currency setting scandal both resulted in large fines for some of the big banks without any admission of guilt or anyone going to prison.

There is another theory out there that takes Dr. Roberts’s thoughts a step further. Le Café Americain is a technical blog spot written by someone known only as Jesse. Jesse believes the requests for repatriation of their gold by Venezuela and Germany triggered the need for the huge takedown in gold. Venezuela requested their gold of some 211 tonnes back in late August 2011. The market reaction at the time saw gold have a quick drop before it recovered to make its current all-time high at $1,911 on September 6, 2011. Over the next few months, gold collapsed roughly 20% to a low in late December 2011. (Jesse’s article is at http://www.24hgold.com/english/news-gold-silver-stand-and-deliver-how-germany-disrupted-the-world-s-gold-market.aspx?article=4423936194G10020&redirect=false&contributor=Jesse).

Germany asked the NY Federal Reserve and the Banque de France to repatriate some 674 tonnes of gold (300 tonnes with the NY Fed and 374 tonnes with the BdeF) in mid-January 2013. The gold market at the time was trading around $1,680. The market topped on January 22, 2013 and over the next 5 months gold prices collapsed roughly 30%. Venezuela took possession of its gold but the NY Fed told Germany that they would have to wait seven years for them to receive all of their gold. This raised the question as to where was Germany’s gold that it would take seven years to deliver. Germany (the Bundesbank) also holds gold with the BofE but have not asked to have it repatriated.

The question out of all of this why should some central banks asking to take possession of their gold have to wait seven years to receive it all. Jesse attempts to answer the mystery and his thesis coupled with Dr. Paul Craig Roberts’s thoughts may have some credence.

Was there a bullion bank or bullion banks in trouble because of the rise in gold’s price? Was the failure to deliver Germany’s gold a cover for the fact that the gold was not there and that the NY Fed had to find the gold or buy the gold in the market in order fulfill Germany’s request. For years there were stories that the bullion banks were short physical gold. Recall that during the 1990’s the bullion banks encouraged the central banks to lease their gold. The leased gold was subsequently sold into the market and that helped keep the price of gold down throughout the 1990’s. But it created a large potential shortfall in physical gold that some suspect has never been covered. Germany asking for its gold back created a crisis of confidence that could have put a bullion bank in trouble. In order to buy the gold back the price had to be lowered so that the “players” involved could buy it at lower prices.

There are few if any parties that could offer 400 tonnes of gold at once (some said it was actually closer to 500 tonnes). A large “player” would offer that kind of size over a period of time not looking to push the markets down too fast. Unless there was another motive, the seller had to know that offering that much at one time would cause a market panic. There are few “players” who would have the funds to offer a sale of that size. It was surmised that it could only be a central bank or a large bullion bank.

The US$ is under attack. The BRIC nations want to create their own equivalent of the IMF and the World Bank. They would also like a change to the world’s reserve currency, which is currently the US$. The US’s QE program is $85 billion a month. With the demand for US$ falling and the US effectively printing money it is a potential inflationary situation that could help to push gold prices even higher past $1,900. Could the request by Germany to repatriate their gold been a trigger to push the price of gold lower so they could purchase gold at lower prices; gold that they needed to buy to cover Germany’s request.

The answer of course remains both elusive and speculative. Since December 2012, the gold holdings at the COMEX have been falling rapidly. Someone has been taking delivery. The ETF’s were shaken out of a few hundred tonnes of their gold. The gold did not just disappear. Someone else bought it. Whoever shorted the gold may not have counted on the sudden surge in demand particularly in Asia. As well, several central banks including Russia and China took advantage of the drop in price to add to their growing reserves. Premiums for sales of gold and silver coins and bars are at their highest levels in years. Gold at sites such www.silvergoldbull.com are being sold at 6-7% premiums over spot. Silver premiums are even higher at over 15% to spot silver.

It is too early to determine as to whether gold (and silver) have bottomed. Certainly, at a low of $1,183 numerous technical objectives were met. But at the heart of the collapse is who and why would anyone offer 400 to 500 tonnes of gold all at once knowing full well the offer could cause a monumental panic and collapse. Unless there were ulterior motives.

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-- Posted Friday, 5 July 2013 | Digg This Article