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Apr 2013 - Gold Saga

  • What happened in April 2013 ?
  • In what is best described as the "Gold Saga" over a period of almost exactly 2 weeks from 9 April to 23 April (with the market impact from 10 April to 24 April), the gold price fell by more than $200/oz within a week. Goldman Sachs (Goldmans) went from bullish/buy gold up to 9 April at ~$1570/oz through "short" gold on 10 April, only to "change horses" back again on 23 April at ~$1408/oz stating close the gold "short" positions, as the gold price could rise. (It is currently [28 May] finding resistance at ~$1400/oz).
  • The gold price coincidentally fell from ~$1565/1575 on 9/11 April to $1380 on 16 April (based on London pm fixes) with a trading low of $1321 and had recovered to $1408 on 23 April amidst unprecedented world-wide demand for delivery and purchase of physical gold, and then increased to resistance about $1470/oz (and sold back down on Friday 10 May to ~$1420/oz & closing ~$1445 [Merrills 9 May forecast: $1200 by June]).
  • November 2012: gold futures margins dropped from 15% to 5% by a Nth Am trader, followed by other Nth Am traders & then the Asian traders.
  • 10 April 2013: Goldmans switch from bullish gold up to 9Apr, to bearish, reduce y/e gold forecast to $1450/oz, recommend "shorting" gold. Gold price drops from ~1580 to ~$1560 as shown in Figure 1a
  • 11 April 2013 (Thursday) : 24-hour Gold trading holds $1550 long-term support (shown in Figure 2a), trading ~$1560 to $1565.
  • 12 Apr 2013 (Fri): After Asian market & as London closes (for weekend) $6bn short futures trade (costing $300m [due to 5%margin]) rep 4moz/124t of gold executed on Comex, London screens "freeze" blocking buy orders, & Comex  follows with 35mins of $15bn (cost ~$750m) short trades rep 10moz/300t of gold.
  • 12 April 2013: Critical $1550 Gold support level broken, computerised stops begin to occur selling gold positions automatically taking gold to $1500.
  • 14 April 2013 (Sunday) : Hong Kong opens Mon 15th, gold drops down to ~$1450/oz.
  • 15 April 2013 (Mon) : London opens, gold falls to pm fix at $1380,
  • 15 April 2013 : Goldmans re-iterates "short" gold, reduces y/e forecast to $1400. Comex down to 1350, HKong opens, down to 1321, & recovers to 1340.
  • World-wide stampede to buy physical gold starts.
  • 16 April 2013 : Goldmans states "Gold no longer a safe haven, switch to natural gas" (their author appears to not understand the allure of gold).
  • 17 April 2013 : Gold finds resistance at $1400.
  • 16/17 April : Asian traders raise futures margins back up from 5% to 15%.
  • 17 April 2013: Gold holds around $1380, falls with HK briefly to $1340 before recovering to ~$1360.
  • ~17 April 2013 : North American traders raise futures margins back up again to 15%.
  • 18/19 April 2013 : Gold encounters resistance at $1400; then $1420 and support at $1400.
  • 21 Apr 2013: Rises back through $1420 with Hong Kong opening.
  • 22 April 2013 (Monday) : Gold recovers in London to $1440.
  • Falls with Comex opening, as Goldmans state that Gold ETF's are a "bubble", ie still negative gold & gold ETF holdings were continuing to fall dramatically (but the gold price held $1420).
  • 23 Apr 2013: Goldmans "changes horses" back again, calls off "short" recommendation as gold could now rise.
  • (Despite no change in the rationale that Goldmans applied : Cyprus, on-off reduction of $85bn per month injection, Gold ETF's actually falling faster than expected, & leave their y/e $1400 target unchanged).
  • 25 April 2013 (Thursday) : Gold recovered to resistance at ~$1470/oz.
  • Conclusions / Results :
  • Goldmans "calls" may have simply been pure coincidence with what happened. The "short" call was made based on falling ETF holdings, and "comments" such as some IMF notes that suggested Cyprus could sell part of its gold for ~$0.5bn to reduce the ~$40bn debt package being sought; and the Fed in its FOMC minutes were considering slowing the $85bn per month injection down to $50bn, which could strengthen the US$ (less money being printed - even though the monthly printing does not appear to have materially weakened the US$).
  • Or Goldmans may have had exposed "short" positions that were at risk of the gold price rising from its $1550 support level shown in Figure 2a, and/or they had a large buy order at lower levels and switched back again when the order had been completed. Apparently it's not the first time Goldmans have been possibly involved in a gold price fall, the prev time (not proven) was ~2008.
  • Whatever was the reason, the reality is that the gold price has fallen through its $1550/oz support level, with only the 10-year trend still intact as shown in Figure 2a, and has severely damaged share market confidence in gold and gold shares.
  • Pandora's box has been opened, hedge funds found the classic unregulated play, where they could "short" $21bn worth of a "stock", in this case "gold", for an outlay of ~$1bn, and score a "multiple whammy" by shorting the other precious metals (they all followed gold down - regardless of individual fundamentals), & could also short the major gold stocks ahead of the "hit".
  • There is no other "stock" that we know of that you can naked "short" $21bn worth at its opening (ie without holding any). Comparatively, it would be like selling ~20% or ~600m BHP on its opening.
  • Shorting the major gold stocks has the benefit of extra downside leverage, if you know that your actions should result in the gold price falling and hence gold share prices falling too - and you can't face prosecution for it because gold trading is not regulated.
  • The Libor ruling at the end of March 2013 was when a landmark class-action civil lawsuit against some banks for Libor-related offenses was dismissed. In that case, a federal judge accepted the banker-defendants' argument: "If cities and towns and other investors lost money because of Libor manipulation, that was their own fault for ever thinking the banks were competing in the first place" (Source:rollingstone). So if instead "a group" colludes in "shorting" then they may not be liable either (it will be interesting to see if the same excuse holds for BP & Shell over UK fuel prices since ~2001).

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Gold Saga Comment

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  • Written by: Keith Goode
  • Monday, 01 April 2013