The Increasing Irrationality of the Gold Market

The gold price fell through key support today, declining by $84 or 5.4%. Silver dropped by $1.81 or 6.5% to just $25.85. I have no problem with corrections in general, as they are a healthy part of any bull market and provide a platform from the which the next upleg can spring. But something is not quite right about the recent price action in precious metals as the markets have become increasingly divorced from reality over the past few months. Let’s look at some of the glaring contradictions and then discuss the implications.

Gold and Silver Drop Sharply Despite USD Holding Steady

Gold is down 4% today and silver has declined by roughly 5%, yet the USD trades essentially flat. Nothing says that gold has to always adhere to the inverse correlation with the USD, but it has been one of the strongest correlations over the course of this bull market. Kitco has a page that shows how much of the daily price change is due to the change in the USD vs. selling pressure. None of today’s decline can be attributed to weakness in the dollar. One has to ask what exactly is causing such extreme levels of selling in the face of a steady dollar?

The chart below shows gold, silver and palladium (to a lesser extent) all dropping sharply, yet the dollar ended the day in the red. It is not often that gold prices drop like a brick without the dollar concurrently pushing much higher.

all metals

Big Banks Telling Investors to Sell While Central Banks Buy at Record Levels

0-hypocrisyThe big banks have been running a coordinated media blitz telling investors to sell gold, all while central banks have been buying at the most aggressive levels on record. This seems to be a case of do as I say, not as I do. While the big banks are massively short gold and silver via derivaties paper trading, they seem to have a rather strong appetite for the physical metals. It was recently reported that JPMorgan and other large banks have been withdrawing huge amounts of physical gold from COMEX warehouses with no explanation.

As reported by Bull Market Thinking… “over the last 90 days without any announcement, stocks of gold held at Comex warehouses plunged by the largest figure ever on record during a single quarter since eligible record keeping began in 2001 (roughly the beginning of the bull market). JP Morgan Chase’s reported gold stockpile dropped by over 1.2 million oz.’s, or rather, a staggering $1.8 billion dollars worth of physical gold was removed from it’s vaults during the last 120 days. The boy who cried wolf has certainly cried many times over the years with regard to the Comex, but if there was ever a time to be concerned of a major market event or default—now might be it.”

Mining Stocks Fall Precipitously, Despite Insider Buying at Multi-Year Highs

Insider activity is often one of the best indicators of future share price trends. When there are 7 times more insider buy transactions vs. sell transactions, those in the know have become extremely bullish. The following was reported from Globe and Mail:

The TSX global gold index has lost about a third of its value over the past two years. The S&P/TSX Venture Exchange, stock full of gold mining juniors, hit a multi-year low this month. Yet, executives and officers who work within those businesses are showing remarkable confidence that the sector is poised for better times.

According to INK Research, there are now seven precious metals stocks on the TSX with insider buying for every one with selling. That’s a near doubling of the ratio since mid-January – and represents a level of lopsided transactions that is usually only seen during major market peaks or valleys.

“That is the type of insider buying we saw in the broad market during the height of the great financial crisis in late 2008 and early 2009,” points out Ted Dixon, CEO of INK Research. “A similar situation now seems to be in place among gold and silver miners.”

Insiders are typically contrarian investors – buying shares when they perceive them to be undervalued. Right now, it appears many think the stocks are going for fire-sale prices.

The Silver Price has Fallen Sharply, Yet Sales of Silver Eagles Have Hit All-Time Records in 2013

silver eagle salesThere has been a record amount of silver eagles sales so far this year, including an all-time high for the month of February. Sales would have also broken the record in March, but the Mint had to hold back sales due to low supply. April is also off to a blistering start and looks like it could break the all-time record for sales during the month. In fact, nearly 16 million ounces have been sold thus far in 2013 and both the U.S. and Canadian mints have been rationing sales to distributors due to supply constraints.

This huge level of demand outpacing supply has also led to premiums pushing significantly higher on both silver eagles and 90% “junk” silver. This 90% silver normally trades at par or a small discount to the spot price, but has risen to as high as $1.28 over spot recently as reported by Gene Arensberg.

It is a strange divergence to see such a surge in physical demand for precious metals, rising premiums and yet the gold and silver price continues to fall. What sense does it make that skyrocketing demand and tightening supply should result in lower prices? Clearly something fishy is taking place behind the scenes, as paper silver contracts and other auspicious tactics are being used to hold down the price of precious metals.

The Stock Market is Zooming Higher, Yet Commodities Keep Dropping

One last divergence to note is between the stock market (S&P 500) and commodities such as silver. This holds true for the commodity index in general, but is even more distinct when comparing the S&P 500 index to the popular silver ETF (SLV). While silver is much more volatile, the two usually trend together. However, they have curiously drifted in opposite directions since the start of 2013. This divergence has spread to extreme levels historically speaking. What exactly would push stocks to such lofty levels without also elevating commodity prices? If industry is really picking up again, wouldn’t demand for silver (50%+ industrial usage) also be picking up? We know that investment demand has been increasing and supply has tightened, so what gives? Do the laws of supply and demand no longer apply to commodity markets? Again, something isn’t quite right with this picture.

SP vs Silver

Conclusion and Recommendation

So, what in the world is going on in the precious metals market? Former Assistant of the US Treasury, Dr. Paul Craig Roberts recently stated his belief that the smash in gold and silver has been entirely orchestrated by the Federal Reserve. He warned that supply of available physical gold is “rapidly declining.” He went on to state:

The exchange value of the dollar is (being) threatened, and if that collapses the Fed loses control over interest rates. Then the bond market blows up, the stock market blows up, and the banks that are too big to fail, fail. So it’s an act of desperation because they’ve got to establish in people’s minds that the dollar is the only safe place, it is the only safe haven, not gold, not silver, and not other currencies.

And to help protect this policy they have convinced or pressured the Japanese to inflate their own currency. The Japanese are now going to print money like the Fed. They are lobbying the ECB to print more. So I see this as a dollar protection policy.

…I know where the gold is coming from in the market, it’s just paper. It’s naked shorts, there is no gold there. If somebody wanted to take delivery on those contracts nobody would be able to provide it.”

Supporting this notion of manipulation and a recent increase in the severity of it, John Embry recently commented:

Both gold and silver have been flooded with several simultaneous waterfall declines on the COMEX. Gold and silver have also been hit by heavy selling during the quietest periods of the day, suggesting that pressure wasn’t coming from profit-seekers. Moreover, almost all rallies on the COMEX were capped at a gain of almost exactly 1%, as algorithms were switched on.

The recent price action definitely smacks of a desperate attempt at holding down precious metals and keeping the fiat fractional reserve debt-based dollar as world reserve currency. I think the powers that be are getting a little nervous, desperate and increasingly blatant in their attempts to maintain their power to print the world’s reserve currency. This comes after an incredible crisis in Cyprus that has shaken the confidence of depositors and investors worldwide.

I think this signals that we are at or near a bottom in the precious metals correction, although the technical damage done today suggests a further decline. At some point soon though, the gig will be up and there will be a flood of money rushing into safe-haven assets such as gold and silver. This rush will be particularly powerful because for the first time in modern history, the other competing safe haven, the U.S. dollar, will be the asset from which people are fleeing and seeking such shelter.

This increased irrationality of the gold market also coincides with the rise of the digital currency bitcoin into the mainstream consciousness. The value of a bitcoin rocketed from $50 to $250 and back now to $100 in just a few months, as citizens worldwide are seeking refuge from an unsustainable and unjust monetary system that appears to be in its last throes. The chart below shows the rapid rise of bitcoin’s total market capitalization in recent months.

bitcoin-s-market-capitalization_chart

These types of market manipulations and distortions tend not to last very long, as investors look to profit from the imbalances and fundamental economic laws begin to re-assert themselves. Some might view this as an opportunity to buy at temporarily suppressed prices and reduce the risk of holding paper assets outside of your control. To get out while the getting is good means to escape this antiquated system with most of your wealth, the product of years of your labor, intact. An expanding percentage of the population is realizing this, pulling their money from the banks and exiting fiat government money in favor of tangible assets or peer-to-peer currencies. Loss of faith in a currency or government can happen very rapidly, leaving the majority of stakeholders empty-handed. Don’t be one of them.

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By | 2017-03-23T14:06:24+00:00 April 12th, 2013|Gold & Silver Commentary|

About the Author:

Jason Hamlin is the founder of Gold Stock Bull and has been investing in precious metals for over 20 years. Jason spent nearly a decade in analytics for the world’s largest market research firm, before finding success investing full time. He launched Gold Stock Bull in 2005 and turned his focus from helping fortune 500 companies to helping individual investors. Jason is a student of Austrian economics and a proponent of cryptocurrencies such at bitcoin.