The gold price coincidentally fell from ~US$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.

Broadly, the events that occurred in New York time, were:

November 2012 : Gold futures margins reduced from 15% to 5% by a North American trader, followed by other Nth Am traders and then the Asian traders.

10 April 2013 (Wednesday): Goldmans switch from bullish gold up to 9 April (Tuesday), to bearish, reducing their year-end Dec 2013 gold forecast to $1450/oz, recommending "short" gold. Gold drops from $1580 to $1560/oz.

11 April (Thursday) : Gold holds $1550 long-term support level over ~24hours, trading ~$1560 to $1565.

12 April (Friday) : After the Asian market has closed and London starts closing for the weekend, a $6bn short futures trade (costing $300m due to the 5% margin) representing 4moz or 124t of gold is executed (reputedly by Merrills) as Comex opens, causing gold to fall through its critical support level of $1550/oz.

Over the following ~35mins, $15bn (costing ~$750m) of short trades representing 10moz or 300t of gold are executed. (A total of 424t of gold are shorted despite Comex's holdings on 11 April, totalling ~286.6t of gold). (To put it in perspective, the $20bn short would be the equivalent of selling ~20% or ~600m shares in BHP as the Australian market opened).

London's pm fix occurs at $1535.50/oz, and the computerised selling stops begin to occur, automatically taking gold down to ~$1500/oz.

14 April (Sunday evening): Hong Kong opens on Monday 15 April and gold falls to ~$1450/oz.

15 April (Monday) : London opens, and gold falls to its pm fix of $1380/oz, being a $200/oz fall from 10 April. Goldmans re-iterates "short" gold and reduces their year-end forecast to $1400. Comex opens and gold falls to $1350/oz. Hong Kong opens and gold falls to $1321/oz before recovering to close at $1340/oz.

World-wide stampede to buy physical gold starts.

16 April : Goldmans recommend  "Gold is no longer a safe haven, switch to natural gas". (Clearly the allure of gold as shown in Figure 1 is not understood, imagine telling your partner, "I haven't bought you gold jewellery, here's a bottle of gas instead").

17 April : Gold finds resistance at $1400, stabilises about $1380, falls on the Hong Kong open to ~$1340/oz. Asian traders raise futures margins back up to 15%. Gold recovers to ~$1360/oz. North Am traders raise futures margins back to 15%.

18/19 April : Gold encounters resistance at $1400, then rises through the level to resistance at $1420/oz and finding support at $1400/oz.

21 April : Gold rises back through $1420/oz as Hong Kong opens.

22 April (Monday) : Gold recovers in London to $1440/oz, but then falls with Comex opening as Goldmans states that Gold ETF's are a "bubble" (ie still negative gold and gold ETF holdings were continuing to fall dramatically). However, the gold price holds the $1420/oz level.

23 April (Tuesday) : Goldmans "changes horses" back again, calls off "short" recommendation as gold could now rise (despite no change in their rationale parameters, if anything Gold ETF's are falling faster than they expected, and Goldmans retains its year-end target of $1400/oz).

25 April 2013 (Thursday) : Gold recovers to resistance at ~$1470/oz

The reasons for the Goldmans call to short gold were 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).

When Goldmans reversed its view back again (after 2 weeks) to bullish gold, its reasons for "shorting" had in fact increased in support of the "short" stance, as the selling of ETF's was occurring at a faster rate.

There has been speculation as to whether Goldmans were exposed with a short position and/or had a material buy order to fill, and once that had been done, went back to their original bullish gold view.

Whatever 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 and has severely damaged share market confidence in gold and gold shares.

Alas Pandora's box has been opened, hedge funds found the classic unregulated play, where they were able "short" ~$21bn worth of a "stock", in this case "gold", for an outlay of ~$1bn, and score a "multiple whammy" if they also short the other precious metals (they all followed gold down - regardless of individual fundamentals), and especially if they also short the major gold stocks ahead of the "hit".

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 shares prices falling too (it's a bit like insider trading for free - and you can't face prosecution for it because gold trading is not regulated).

We asked a representative of ASIC if it could happen in Australia, and the answer was probably yes, because gold and commodities are not regulated.

The Libor ruling at the end of March 2013 also created a surprise in some circles, 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 higher UK fuel prices since ~2001).

The paper gold price has since fallen back ~$70/oz from ~$1430/oz below $1380/oz to $1355/oz on 17 May, before closing in New York at $1360/oz on the back of a stronger US$ as the Fed are reputedly still considering reducing the $85bn per month of QE.

However, the US may have to do something because the debt ceiling is apparently approaching again and needs to be readjusted higher in order for the US to continue printing money. There was also a comment that the US was considering printing some money and reducing its public debt, which was also viewed as bullish for a stronger US$.

US$ aside, though, the biggest disconnect has occurred between physical demand for gold and paper gold trading. A number of bullion banks have now declared force majeure or the refusal to deliver gold to clients that want to withdraw their holdings, and instead are apparently giving such clients either a certificate or cash. The Fed has stated that if any US bullion bank defaults, then that bank's clients will receive their holdings in US$ cash.

Comex stocks have been falling, and there is doubt as to how much of the ETF holdings are actually based on physical gold or whether they may partly be a multiple of physical gold especially after a Hong Kong trader stated in the China Daily that ETF holdings are not accurate or realistic as gold can be borrowed.

Attempts are being made to reduce physical gold demand, such as by India restricting imports because of the outflow to gold purchases is upsetting their deficit, and the US intends to ban Turkey and anyone else selling gold to Iran (as part of their sanctions against Iran) from 1 July 2013.

While these shenanigans appear to be occurring in the background, the reality is that gold producers are receiving less income for the gold that they produce, and most of them do not have any hedge "cushion" to fall back on as the mostly investment funds were against companies that hedge.

However, under a falling gold price environment, those funds are having to reduce or outright sell their gold share holdings due to redemptions. If anything the gold stocks that the investment funds now want to hold are the ones that have some hedging in place (like Evolution and Regis) and are able to receive relatively higher gold prices for their gold production.

As Sean Russo of Noah's Rule stated in his presentation at the May 2013 RIU conference in Sydney, gold companies should hedge and protect their downside. Investors want gold stocks to have exposure to unlimited gold price upside, but limited gold price downside.

As Evolution commented at that RIU conference, they were tempted to pay and close out the remaining Catalpa hedge of ~152.2koz @ ~A$1573/oz that Sean Russo put in place, but are glad they didn't and are now delivering into it.

There is a glimmer of light in that the A$ may fall to ~0.90 to the US$ if Australia continues to reduce its interest rates by possibly ~1% by mid-2013 (provided that the A$ does not become a safe haven parking lot again if the Euro has another major wobble). A lower A$ does provide some cushion to producers whose products are based in US$. However, their gold share prices tend to follow the US$ gold price, as they have done so for many years.

As to what level the gold price could now fall to, Sean thinks that "the pain" is about $1200/oz, that's when mines probably start closing, having already stopped exploration beforehand. The signs of major reductions in exploration, idle drill rigs, falling wages and rising unemployment in the services sector are already beginning to occur and that is at ~US$1400/oz. 

So was the ~US$200/oz gold price fall manipulation or coincidence or a bit of both. Whatever it was, the perception of gold has been badly damaged, and Pandora's box has now been opened on what hedge funds are able to do in an unregulated market.

Only time will tell, whether the gold industry has to pass through the usual 1.5 years in the wilderness, or whether the shorts will at some stage have to scramble to cover their positions.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1. A Gold Jewellery Shop in Istanbul's Grand Bazaar in October 2012