247Bull.com Editor: The price of gold is not set in the physical market where people are taking physical delivery of the metal. Instead it’s set in the paper futures market in which the number of contracts greatly exceeds the amount of physical gold that’s available to back-up these contracts. What this means is that the major bullion banks can force the price down to suit their purposes. And that is exactly what seems to have been happening since early April. The motive for the April takedown in gold is not clear. However, a rising gold price is the canary in the coal mine as far as problems in the monetary system are concerned and therefore the Fed could have many reasons for wanting it suppressed. In order to achieve this objective it seems likely that the major bullion banks, at the behest of the Federal Reserve, chose to dump a huge number of short contracts on to the Comex. This sudden excess supply of paper gold drove the price down sufficiently to trigger automatic sell orders and margin calls, something which drove the price down further. The bullion banks were then able to buy-up physical gold as it was sold from the ETFs.
The spot gold price rose as high as $1394 per ounce during Thursday’s Asian trading, before easing back by lunchtime in London, as European stock markets also fell, following selloffs in the US and Asia.
Silver dropped back below $21.90 an ounce after briefly touching $22, while other commodities were also down on the day.
“The trend is still bearish [for gold and silver],” says technical analysts at Scotia Mocatta.
Japan’s Nikkei 225 fell 6.4% Thursday, taking the index down to more than 20% below last month’s five-year high, and thus fulfilling a common definition for a bear market. Thursday’s fall comes two days after the Bank of Japan decided not to announce any additional stimulus measures at its policy meeting.
“There’s a global selloff in risk assets,” says Nader Naeimi, head of dynamic asset allocation at AMP Capital Investors in Sydney.
“Short term there was froth and that needed to come out, especially in Japan.”
Emerging market stock indices have also been hit in recent weeks, as have emerging market bonds
“Safe assets are not entirely safe anymore,” says Jeffrey Shen, head of emerging markets at the world’s biggest asset manager BlackRock.
“There’s nowhere to run and nowhere to hide,” agrees Jack Deino, senior money manager who overseas emerging market assets at Invesco in New York.
“There’s been just a lot of money out there looking for yield. Part of the selloff is attributable to the [potential] pulling back of [Federal Reserve quantitative easing], and you can’t do anything about that.”
The Dollar meantime has lost ground against major currencies since the start of June. The Euro has rallied to touch a four-month high above $1.33 this morning, nearly 3% up on the month. The Pound is up 3.1% on the month at just below $1.57, while the Dollar has also lost ground against the Yen, falling to ¥94 to the Dollar this morning, down from last month’s five-year high of ¥103.
The Dollar’s depreciation in recent weeks has broadly coincided with falls in global stock markets, with the Dollar having strengthened during much of May as stocks also gained. The 30-day correlation between the US Dollar index and the S&P 500 rose to its highest level since October 2008 at the end of last month, Bloomberg reports, arguing that this is “a sign that traders are gaining confidence in the sustainability of the US recovery”.
“The way the Dollar is trading relative to risk is totally different [to its behavior in recent years]…the whole nature of the Dollar as a funding currency is breaking down,” says Jen Nordvig, global head of foreign exchange strategy at Nomura Securities in New York, referring to a phenomenon whereby traders have taken advantage of low US interest rates to borrow in Dollars to buy high yielding assets elsewhere.
Over in India, traditionally the world’s biggest gold buying nation, imports of gold have “come down significantly” since the government raised the import duty to 8% last Wednesday, according to Bhaskar Bhat, managing director at the country’s biggest jeweler Titan Industries, whose shares are down nearly 25% since the hike was announced.
“Gold imports have sharply come down,” finance minister P Chidambaram told reporters Thursday.
“Net gold imports averaged $135 million a day in first 13 business day in May till May 20. However, in the subsequent 14 business days, it averaged only $36 million…I would be happy if they come down even further.”
When asked if the government is planning any further duty hikes however Chidambaram replied that he does not want to become too unpopular.