Will The U.S. be Able to Dominate the Gold Price Both Ways

In April the gold price buckled and fell $330, $200 of which took only two days. It was a well-engineered bear raid, initiated by over 400 tonnes of ‘short’ positions on the COMEX futures and options market. But the futures and options market is not likely to cause the price of gold to fall as only 5% of that market involves the physical delivery of gold and then only after the counterparty has been put on notice that physical delivery of gold is required.

But over the period of the bear raid, 200 tonnes of physical gold was sold and delivered from the COMEX warehouse. The two main banks involved, JP Morgan Chase and Merrill Lynch, used up at least 200 tonnes of their own gold selling it to force the price down. But the main incentive to sell came from the persistent sales of gold from the SPDR gold ETF, which has seen around 500 tonnes of gold sold from the fund over the last three to four months. So the big holders of gold in the U.S. sold just under 1,000 tonnes of gold in the last three to four months, with the bulk being sold in mid-April. It is therefore quite a surprise that the gold price only fell the $330 that it did.

The focus of this piece is not to look at the potential for a ‘short squeeze’ (which is huge) but to look at the ability of the U.S. institutions involved to not only repeat the exercise, but to influence the gold price in the future. More particularly can the country push the gold price down much further or has it used up all its powder in the last bear raid?

The SPDR Gold ETF & the Gold Trust

These two gold ETFs are the main holders of gold in the U.S. The Gold Trust, at its peak, held 200 tonnes of gold. The SPDR gold ETF held over 1,500 tonnes. Today the Gold Trust is down to 186.33 tonnes and the SPDR gold ETF is down at 1003 tonnes. The unanswerable question is how much more of that 1,000 tonnes is being held with short-term to medium-term profits in mind and how much is being held as a core holding, being held for the long term (i.e. will not be sold no matter what)? If the entire amount is going to be held long-term then no more sales will come from this fund. If another 500 tonnes is a profit oriented holding then this could be sold in the future. The same thinking applies to the Gold Trust. We know that COMEX will consider 200 tonnes held in its warehouses on the low side already and the banks and hedge funds would not be happy to run their stocks down further.

The object of the exercise is to gauge whether the U.S. could launch another bear raid on the gold price and push the price down much further.

Is the Price of Gold Relevant to Price Vulnerability?

Price is also a major consideration because that will dictate the response demand will give. After the gold price crashed in April, physical demand from all over the world came in frantically to pick up gold. We estimate that nearly the entire amount sold went to Asia or central banks and has left to market into very long-term holder’s hands. For that gold to return to the U.S.A. would require a price that rose very quickly and looked ‘toppy’, for Asian sellers to come to the market as sellers. That price would have to be several hundred dollars over the current price level.

Support for the gold price is further helped by the drop in payable reserves the mines now have. With cost in the gold mining industry per ounce being so high, the volume of profitable reserves drops sharply as the mine has to move to grades that are more profitable. Allowing for a return on capital, the mines currently need between $1,000 and $1,500 to make any profits unless they move to higher grade –so shortening the life of the mine.

Scrap sellers who were comfortable selling gold over $1,650 pull off the market when the price tumbles like this. After all if it rebounds, after they have sold, they are most unhappy, so they wait until the price recovers. So a large chunk of ‘scrap sales’ leaves the markets.

Demand Would Rush in at Lower Prices

Combine these supporting factors and it becomes clear that if the gold price does fall much lower, buyers will rush into the market as they did in May. A ‘bear raider’ could not afford to take the risk of selling physical gold, only to see the gold price jump thereafter. He would then pay dearly to close his short positions. It would be too risky.

So in short, another bear raid is unlikely at these levels. More importantly with the available stock of gold remaining in the U.S. at such low levels, another bear raid would use these up in large part. If that happened the ability of the U.S. gold markets to influence the gold price would be lost completely. The dominant influence over the gold price would have moved to Asia.

Shift of Power over Gold Moves East

What this would mean to the gold price would be that the power of U.S. speculation over the gold price would have been used up as the gold needed for this purpose would have left the States. It would render reports that tell us “the gold price fell because U.S. housing starts had jumped last month” incorrect, because U.S. investors would not have the ability to speculate in the volumes needed to move the gold price.

With the global cash flow, estimated by Wolfensohn, ex-head of the World Bank, changing from 80% to the developed world and 20% to the rest of the world, to 65% to the rest of the world and 35% to the developed world, the Asian influence over the gold price would dominate, relegating the present influences from the developed world, to history.

Is the U.S. Selling Gold from Reserves?

Competent analysts are debating whether central banks are supplying the market to keep the gold price down at the moment. The first question we ask is, “What would this achieve except to delay a collapse of the key currency markets?”  With a multi-currency system approaching on the horizon a collapse of the system would have to be an immediate prospect to warrant such sales. This is because when that multi-currency system does arrive, gold reserves will play a pivotal role in the monetary system. So central banks would lose a key resource in maintaining stability in currency markets if they used gold now. Bearing in mind that European central banks individually are locked into a Central Bank Gold Agreement, which does allow sales but has not seen any –in the spirit of the agreement—since 2009.

So we would be surprised to see such sales at this time.

Consequences

What we have looked at in this article is:

•    Do the U.S. markets have the gold available and willing, to be used to suppress the gold price much longer? We think that this amount is dropping daily and will run out.

•    The gold used for that purpose to date has left the U.S. and is now in Asia.

•    A fall from current price levels would attract tremendous demand, so further price suppression would need large volumes of gold to effectively keep prices down.

•    Current supplies of gold are falling precisely because gold prices are so low.

•    With Asia gradually becoming dominant over the gold price, with the view that it should be acquired for the long-term and continuously, the U.S. is losing its influence over the gold bullion markets.

Will the new influences show themselves quickly and dramatically? We think now. What we will see are a narrowing of speculative price moves with a tendency to react less and less to developed world micro events. We will continue to watch the sales from the SPDR gold ETF as a prime indicator of the current U.S. influence and its weight of influence on the global gold market.

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