Gold prices fell the most in more than two months last week mainly due to renewed speculation over the timing of the US Federal Reserve’s (FED) tapering of its monetary stimulus programme.  After breaking below certain key support levels, the price of spot gold ended the week with a 3.5% drop to end the week at $1243.70 per ounce. After dropping below $1300 an ounce, the selling accelerated on Thursday taking gold through the support level at $1,250, which many analysts saw as important for the market to hold. While prices initially managed to hold above $1240 an ounce, traders are eying this level as a break below could signal more technical selling with some analysts even suggesting a dip to the $1,220s as possible as bearish technical charts and little positive news is available to offset the price-negative sentiment in gold. This did occur but there was a rapid rebound back to $1250 although, at the time of writing, gold has been struggling to maintain this level.

Interestingly, gold trading on Comex was interrupted twice last Wednesday, according to Nanex, which provides exchange data and summarizes high frequency trading activity.

Nanex reported that about 1,500 gold futures contracts traded in one second at 6:26:40 a.m. Eastern time on Wednesday, triggering a $10 drop in prices and a 20 second trading halt.

Damon Leavell, a spokesman for the exchange said trading was halted for about 20 seconds at 6:26:41 a.m., New York time. The December contract fell about $11 in less than a minute before trading was suspended.

Then, immediately after the release of the Fed minutes, came another burst of selling which led to gold futures being suspended for another 20 seconds. The second bout of concentrated selling is believed to have been even more than 1,500 contracts. Each contract is worth 100 ounces so 1,500 contracts is worth nearly $200 million.

Shortly after 1 am Eastern Standard time on Monday, someone tried to dump 1500 gold contracts into an entirely illiquid gold futures market. The 150,000 ounce notional sell order ($184.5 million), sent the price down $10 instantaneously and tripped the exchange’s circuit breakers and halted the market’s trading for 20 seconds (once again). This is now the fourth time this has happened in the past 3 months, and this time on no news whatsoever.

It is becoming increasingly obvious that someone out there is trying to push down the price of gold, determined to undermine the confidence of potential gold investors, and this is happening far too often to be a mere coincidence. The market was halted on similar drops on April 20, 2013, September 12, 2013, October 11, 2013 and November 20, 2013.11.26

 Since the end of October, traders have dominated the gold market, betting on the possibility that the Fed will soon reduce bond purchases even though Janet Yellen said last week that she would continue with the bank’s ultra-easy monetary policy until officials were confident a durable economic recovery was in place that could sustain job creation.

While the tapering of the Fed’s stimulus is mere conjecture, it has nevertheless created a bearish sentiment amongst traders who have used the futures market of Comex to sell massive amounts of gold contracts causing prices to fall by around $100 an ounce in the last three weeks.

As far as I am concerned, this frequent irregular action is part of a strategy of central bankers and Western politicians to beguile individuals into investing in equities and bonds or simply get further into debt. The major central banks, the US Fed, ECB, BoJ, and BoE are all engaged in monetary expansionary programmes renamed quantitative easing. In simple terms, they are printing more and more money. At the same time they have dropped interest rates to almost zero. So, individuals who have saved are getting nothing on their savings while at the same time the purchasing power of their money is becoming less each month.  It is a dilemma for pensioners because the money they are receiving in interest payments is not enough to get by. And, for those hard working individuals who like to save, having money in a deposit account is hardly a proposition. So, in order to find a higher return, they are being persuaded to invest in equities. While investing in equities is not a bad thing at all, the current scenario is anything but healthy. Prices of global equities are being artificially propped up by the policies of these central banks and have nothing to do with stellar economic growth.  As the prices of stocks continue to rise, individuals are being persuaded to buy these to keep prices moving upwards. Alternatively, they are being induced to use the low levels of interest to buy homes and cars and thus get themselves further indebted to banks.

In the UK total personal debt has reached record highs – 1.4 trillion pounds.According to a report by the Centre for Social Justice (CSJ) an average household debt of £54,000 is now almost twice the level of a decade ago. Indebted households in the poorest 10% of the country have average debts more than four times their annual income. 
According to the report, entitled ‘Maxed Out’, over 130,000 people declare bankruptcy or some other form of insolvency each year in the UK. More than 8 million households have no savings at all, affecting about 50 percent of low-income households. Consumer debt has trebled since 1993, reaching nearly 160 billion pounds in 2013. 
“Years of increased borrowing, rising living costs and struggling to save has forced many families into a debt trap that is proving very difficult to escape,” director of the CSJ, Christian Guy, explained, warning that problem debt can have a “corrosive impact on people and families,” affecting their mental health, relationships and wellbeing. 
An estimated 1.1 million people over 50 years old are in problem debt. 
The study, led by former Labour Party politician and Pensions Minister Chris Pond, said that problem debt carries a major human cost. 
“With falling real incomes and increasing costs of basic essentials, many – especially the most vulnerable – are sliding further into problem debt. The costs to those affected, in stress and mental disorders, relationship breakdown and hardship is immense. But so too is the cost to the nation, measured in lost employment and productivity and in an increased burden on public services.” 
With the rising costs of domestic energy and other major household bills, more households might be pushed into problem debt, the study warns. In 2012 an estimated 1.85 million households were three months in arrears on at least one household bill or payment. 

“The 25 percent increase in the cost of living over the past five years combined with job insecurity and low savings mean that many households have been pushed over the edge,”
 the study says. 

“Those on a low income are not victims of a housing bubble or an international banking crash, but of a financial system that is rigged against them.” 

While, banks and governments can borrow at low interest rates, risk free because if they fail, they will get bailed out, savers are being penalised and duped into thinking that they must invest their money into equities, bonds or homes.

This is a bubble about to burst. It may not be now, but it may be next year or even the year after. However, once it does burst, these people will lose fortunes.

Whether you believe that gold prices are manipulated, or not, is your decision. But, let me remind you that most of the most highly respected and well–known banks in the world have all been found guilty of manipulating Libor, energy, and currencies. They were also found guilty of lying to their own clients about buying useless mortgage backed securities and other assets. And, while these banks have had to pay billions in fines for their actions, not one single banker or government official has been prosecuted.  When it comes to gold, Bloomberg recently reported that the U.K. Financial Conduct Authority is reviewing gold benchmarks as part of its wider probe of how global rates are set. Evidently, the FCA review is preliminary and hasn’t risen to the level of a formal investigation.

One of the key benchmarks is the London gold fixing, a measure of the spot price for physical gold that is set twice daily by five banks. Regulators around the world are examining alleged abuses of a number of financial benchmarks by companies that play a central role in setting them. Inquiries were triggered after it emerged the London interbank offered rate, or Libor, the benchmark interest rate for more than $360 trillion of securities worldwide, was being manipulated.

The London fix, the benchmark rate used by mining companies, jewellers and central banks to buy, sell and value the metal, is published twice daily after a telephone call involving Barclays Plc., Deutsche Bank, Bank of Nova Scotia, HSBC Holdings, and Societe Generale. Even though prices may change immediately after the fix, it has been a tradition that dates back to 1919.

The U.K. Financial Conduct Authority is scrutinizing how prices are set in the $20 trillion gold market, according to a person with knowledge of the review who asked not to be identified because the matter isn’t public.

The process, during which gold is bought and sold, can take from a few minutes to more than an hour. The participants also can trade the metal and its derivatives on the spot market and exchanges during the calls. Just after the fixing begins, trading erupts in gold derivatives, according to research published in September. Four traders interviewed by Bloomberg News said that’s because dealers and their clients are using information from the talks to bet on the outcome.

According to the London Bullion Market Association, London is the largest centre for gold trading in the world. Around $33 billion changed hands there each day in 2012, exceeding the $29 billion of futures traded on Comex, data compiled by Bloomberg show.

The FCA review is preliminary and not a formal investigation, another person said. The people wouldn’t say what’s being looked at or if regulators suspect wrongdoing. Regulators are looking into how benchmarks are set and governed across the financial system after five firms including Barclays and Royal Bank of Scotland Group Plc were fined a combined $3.7 billion for rigging the London interbank offered rate, or Libor.

Investigators from Switzerland to Hong Kong are probing currency markets after Bloomberg News reported in June that traders communicated with each other and timed trades to influence foreign-exchange benchmarks and maximize profits.

If gold prices continue to slide, it is essential that you are not beguiled into thinking that you own a barbarous relic. There is enormous value to owning gold. And while it may not be apparent now, things are bound to change in the very near future. The Chinese have already figured this out and that is why they are buying as much gold as possible.

They are also making currency deals with many of their counter parties so that they do not have to trade through dollars. Recently, China announced that they will be invoicing their oil imports in renminbi in yet another major step to avoid using the US dollar as the world’s reserve currency. This means that China will have bilateral trading arrangements with Russia and the other major countries, such as Iran, that provide energy to China. 

And, as Western central banks, and their agent bullion banks persist in suppressing the price of gold with their paper contracts, Asian countries will continue to take the physical gold.

Don’t be fooled. Continue to add gold to your investment portfolios.

 

TECHNICAL ANALYSIS

 

The recent fall in gold prices has broken various support levels, indicating a possibility of further downside action and sideways consolidation.

About the author

David Levenstein has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.  He has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali. For more information go to: www.lakeshoretrading.co.za