Drop in Gold_ What Happened?

04/22/13
The gold market incident on Friday, April 12, 2013, caused gold to drop $80 in 40 minutes which is an historic event. On Monday, margin calls in the futures market caused by stop orders required more settlement. On Monday, news rumors broke out that more countries need to “Sell more Gold”. These messages flooded the media.  Let’s examine this transaction and its implications.

Normal Shorts
Let’s first define what is a “normal short” so that this gold transaction can be examined in contrast to what is “normal”. In the stock market if you wanted to short a stock such as IBM, the rules are that you must possess that stock or borrow it from someone – usually your broker. This is a perfectly legal transaction. This is how it works. If IBM were at $200 per share and you thought it was going to drop and you owned the stock, then you can sell it for cash with anticipation of buying it back at say $180 per share. This is a way to make money on your stock even in a down market. When the stock is $180 per share, you buy it back and make a profit of $20 per share.   This is the normal way for you to profit on your possession in a down market.

What Happened
In order to understand what happened at the COMEX, one should understand that there are two markets. Specifically, there is a paper market for gold at the COMEX which is independent of the physical market. In the COMEX market no one ever looks at taking possession even though it is possible.  Generally, these are cash settlement transactions.   The transactions are large, and being an options market, the dollars are much smaller than the thousand oz lots that are involved.  I am indebted to Bob Reneir and his article in the International Forecaster, dated 04/20/13 for providing the numbers and specific times that occurred on the floor.

On Friday the following two events took place:
o  Suddenly, a 100 ton quantity of gold was put on the market to sell. This is 3.5 million ounces of gold.
o  Gold quickly fell to the next support level and stayed there for awhile.
o  At this point, seller “B” sold 300 tons of gold representing 10.5 million ounces.
o  Consequently, gold dropped $80 per ounce in 40 minutes.
o  The loss on this transaction for sellers A and B was $1.12 billion. (14.0 x $80.0 = $1.12 billion)
o  A normal transaction would have placed this size of order over several weeks so as not to drive the price down and take such a loss.
o  Conclusion: this was pure market manipulation using naked shorts to move the market down. This represents $21.7 billion cash transaction in the 40 minute period.  (14.0 x $1,550=$21.7 billion)

On Monday, margin calls were issued causing more selling and further pressure on the price of gold. In addition, on Monday the media was flooded with stories about why countries such as Cyprus should sell some of their gold (They are not doing so and claim they will not); banks are selling their gold (not true, they are buying); it is time for investors to switch from gold stocks; and finally the normal media misinformation of “It is foolish to own gold” and “gold is a poor investment”.

Market Manipulation
The above event documents the transaction that is pure market manipulation. It was performed by the FED and our own government. How does one know? The answer is simply in the size of the transaction and the loss involved. It required a loss of $1.1 billion to drive the price down $80 in 40 minutes.  No rational organization would do this because they do not have that kind of money and no private entity could afford a foolish $1.1 billion loss.

Why would the FED do this? The answer is that the purpose was to drive the price of gold down to move people back to dollars and stocks. This raises the question of why would the government want this? The answer to this question is to support the FED. Please understand that the FED is running our financial system, money supply and our currency. The government supports their moves even though the FED is a private banking cartel. The FED is currently in a currency war to support the dollar – a Federal Reserve note. The Federal Reserve note is the “dollar” and it is not a treasury note. It is pure fiat money. Currently, it is being attacked from all sides by the rest of the world. This includes Russia, China, India, Iran and others. Their goal appears to be to remove the dollar from being the international currency and to return to an international gold backed currency. If that occurred, then there would be no need for the dollar.  Read that again because if that occurred, there would be major implications to your personal life.  Their immediate attack method is two pronged.  First, they move the dollar down with respect to other currencies so that the products within their sovereign nation look lower cost to American goods; and second, they enter bi-lateral agreements rather than use an international currency of the dollar so that they can use local rather than international currency.

Currency War
The world is in a currency war. All nations that are large are participating and it appears to me that they all will eventually lose. Instead of “bullets”, the nations are using printing presses for their fiat money. Currently, the United States is printing $85 billion per month or $1.02 trillion per year.  Another example is that Japan just started printing $1.4 trillion per year with an economy that is much smaller than the United States.

The nation’s central banks use this money to buy back toxic loans and their treasury notes. The net result is that the banks and pension funds and government who own these instruments are now being flooded with fiat paper to the tune of at least another $2.4 trillion per year. There are four reasons likely that this approach will fail:

o  Today the United States has only a 10% manufacturing base in contrast to 70% in 1946. We have become a service economy and no longer are a significant manufacturer. We don’t make many goods that can be lowered.
o  History has shown that nations will cheat on one another in order to make their prices lower.
o  Emerging markets such as in Latin America, Africa and even the European Union may not agree and print their own money.  This would lead to the price levels being the same but that the global fiat dollars in circulation becoming enormous.
o  Most importantly, this creation of excess fiat dollars will most likely get out of control. The net result of this would be a situation that is precisely identical to what happened in 1929 and in the early 1970s. Specifically, this flooding of fiat paper will cause the central banks to react. Their reaction of pulling back fiat dollars and increasing interest rates will cause a major global market crash and an associated industrial crash.  Finally, countries will shut down. This is what happened in the 1930s depression.  Again we have a situation where one could ask, “Is this being orchestrated or is this just going to be the result of short sighted government policies”? Note that Greenspan just announced that he would not be at the Jackson Hole summit in August ? the first time in 25 years.   Is this significant? Many believe so.

The Gold Market
Pleas understand that the physical gold market is different than the paper Comex market. For instance, the physical market for gold is currently being overwhelmed by demand driving prices up.  This causes a price differential between physical and paper gold. Even the morning of the event, physical gold was selling at approximately 30% more than the COMEX price. This fact tells us, along with other evidence, that most likely markets today are fraudulent. Specifically:

o  Central banks keep interest rates artificially low and at the same time complain that China is manipulating its rates low.
o  Company earnings are being shown to be based on false accounting and cannot be trusted because of the pro forma statements which they warn you about in their annual reports.
o  The government says that there is no inflation but anyone buying in a grocery store knows that this is a blatant lie.
o  The state of the economy is stated by the government as being in an “improving state” which is blatantly false based upon even their misinformation:
       *  Manufacturing is down to 10% of this economy and lagging;
       *  Unemployment is at 23% not the 9% the government reports.
       *  Food stamps are currently used by 59 million people and going up.
       *  The IRS reports that they are being flooded by immigrants with fictitious dependents in order to receive cash back. As many as 23 dependents living overseas are being reported.
       *  Social Security disability is now “easy” to get and is expanding exponentially in order to put these non-working people on some form of income.

And it goes on.

Keep your gold and if you can afford it, buy more at these prices.

.