There's been a change in the status quo. For twelve years gold has been steadily increasing with just the occasional sell off like during the 2008 crisis when gold was briefly sold off to meet margin calls on other trades. It then resumed its gradual increase until Dec., 2011 when that uptrend was broken. This blog began soon after.
While the fundamentals for precious metals has only gotten better since then, the prices have mostly moved sideways. I have raised the question several times about the bifurcation between paper prices and physical prices and even predicted that they would diverge this year. Today as I write this they are still very much correlated and, in fact, Eastern countries (Almost certainly including China) are taking advantage of the paper price "hits" to make purchases of physical gold on a scale we certainly have not seen since 2008.
Let's take a look at this game changer:
(Click Read More below)
First, I want to repost this from TFMetals:
Last month, I conducted two podcasts with Jim Willie. Among the important items that Jim passed along was his information regarding "Eastern" gold purchases. Jim has an excellent and well-connected source who informed him that, since 2/28/12, over 5,000 metric tonnes of gold had purchased and removed from Gold Cartel vaults. Of course, I have no idea of whether this is accurate but the telling part of Jim's information was this: The source didn't simply inform Jim that it was "5,000 tonnes", the actual information was "as of last Friday, 5,000 tonnes". Does this exact verbiage make the information more reliable? Perhaps. In the end, the exact tonnage isn't important. I've been able to confirm through my own contacts such as "Winston" is that massive amounts of gold are being purchased every day by "Eastern" interests, namely central banks and sovereign funds. This incredible, physical demand is the primary reason paper gold bottomed at 1525 and has now reversed.
To put 5,000 tons (or tonnes if you're British) in perspective, its roughly equal to the gold holdings of Italy & France combined!!!
The night before Bernanke was to testify before Congress gold was "attacked" in the overnight markets which are generally very thinly traded. Readers of TFMetals wrote in to describe what they saw:
I was watching gold sell off tonight, wondering how low it would go. Then I saw the spike down. On my depth of market order entry application (NinjaTrader), there was absolutely no bids or ask in the system. So I placed a limit order quickly at 1567. There was a long pause, but then my screens came back to life and suddenly the price slipped all the way down to 1556. I was pissed because I thought I was filled at 1567, but my long of 6 /GC contracts was filled at the absolute bottom 1556.4.
This almost conclusively proves to me that liquidity (bids) was purposely removed. How did I get filled at the absolute bottom?
Regardless to the inner workings of the access market, somebody dumped 1750 contracts in a market order, all at once. Same bullshit as always but this time I am getting even with these bastards.
I can prove that my order was filled at 1556.4 if you are interested.
Corroborating this was a second email I received a couple of hours later:
Hello Turd, I too was trading tonight when the bomb was dropped. I usually find the late evening hours from 8pm ET to around 11pm not too bad for trading,.....the volume usually is light and trading slow.........but tonight felt different.......I watch the Euro and the Yen and the Yen was catching some bids and moving on up........I am a one contract trader and just trade for a few dollars either way........I stopped myself out of a long at 1580.20 in the Aug gold and walked away from the computer.....when I came back a few minutes later I could not believe what I saw.......
the volume for those 2 minutes if I remember was around 1800 contracts..........it usually won't trade that amount in 6 hours at night........they were gunning for the lows on the chart around 1579 and took them out with a vengeance..........this is not hedge funds trading in the middle of the night nor the small speculator......this was a coordinated massacre and the collateral damage was any long specs whose stops slipped by 5 or 10 dollars at least...........after the initial rebound rally, the market was so thin and quiet for the next 35 or 45 minutes.....most were shellshocked, if not broke, and there were no players left........I am done ranting
And TFMetals wrote this:
In the end, it's as if the entire bid/ask system was momentarily shut off. Into that void, a massive order was dumped for maximum effect and damage. A momentary, deliberate "flash crash" designed to game and flush any unsuspecting buy stops. It's deliberate, overt manipulation but it is sadly, for now, the way the game is played.
We've seen attacks on the PM just prior and coinciding with Bernanke testifying before but there seems to be a new twist.
From King World News:
With many global investors still rattled by the recent price action in gold and silver, today King World News interviewed the “London Trader” to get his take on these markets. The source told KWN that not only was a shocking amount of paper gold sold in just 4 hours yesterday, but it was also confirmed that the mainstream media is not reporting the staggering amount of physical gold that has actually been purchased by China recently. Here is what the source had to say: “China has purchased hundreds of tons of gold in the last couple of months. China is not disclosing what their true reserves are. Russia is delaying disclosure and so is Iran. We saw record gold imports of over 100 tons through Hong Kong to China in April, as reported by the mainstream media, but what has been reported is just the tip of the iceberg.”
The London Trader continues:
“What we've seen is a dramatic acceleration of physical gold purchases as the price has been drawn down. Staggering amounts of physical gold are being purchased. The acceleration of physical purchases, at these lower levels, is the reason why gold has been holding firm and building such a nice base.
I want to be very clear about this, in addition to what is being reported by the mainstream media, we have seen hundreds of tons of additional physical gold being purchased by China over the last three months....“What happened yesterday in the gold market was very interesting. One full hour before Bernanke's testimony, the bullion banks started selling. Over the next 4 hours, the bullion banks sold the equivalent of 515 metric tons of paper gold. This was in just 4 hours, and again, the selling started one hour before Bernanke’s testimony.
The selling went on for another 3 hours after the Fed Chairman began to speak, and as I said, over 515 metric tons of paper gold was sold. During this entire takedown, there was zero physical gold available for sale in the market. However, this action did create tremendous supply for the Eastern buyers to lock in the spot price of gold. This will patiently be converted to physical in the coming weeks.
The real question here is, how could an entity begin selling such a massive amount of paper gold when there hadn’t been any news (starting to sell before Bernanke's testimony)?
During this coordinated attack on gold, hedge funds and managed money were being forced out of their paper positions. A large wave of selling entered the paper gold market and traders saw the price of gold drop $40 in a matter of minutes. So the action was orchestrated by the Fed, and Fed-speak was used to assist in the takedown.On the opposite side, the rise we saw last Friday was not a natural rise, it was a squeeze of the hedge fund shorts. After squeezing the hedge fund shorts on Friday and actually getting them to take on some long side exposure because gold took out key resistance levels, they then dropped the gold market like a stone yesterday. So the commercials are ringing the register at both ends of the tape. But in reality, what the bullion banks are trying to do is to get out of some of the massive naked short positions that are on the books.
During all of the chaos of the last couple of months, the Eastern hemisphere have been vacuuming physical metal out of the market. However, supply is very tight out there. As I mentioned earlier, no physical gold was for sale yesterday during the takedown, just paper gold. Gold actually went into backwardation, and silver has actually been in backwardation for weeks. For immediate delivery of gold, in size, we are seeing delays, but silver is extraordinarily backlogged.
Also, there was an absolutely staggering amount of silver that was purchased by an Eastern buyer three weeks ago near the $27 level. This order was breathtaking in terms of the size. It is currently queued up at two refiners, but has been backlogged for the last three weeks and running. In other words, we are looking at serious backlogs for physical silver.
So as I said earlier, the bullion banks are ringing the register at both ends, while trying to extricate themselves from their short positions in the paper market. They are attempting to do this before transparency comes in to the market. They do not want a situation where the aggressive hedge funds actually get evidence that these bullion banks are naked short.
They are concerned that if it is discovered they are naked short gold and silver, those hedge funds will aggressively target those banks. This is what happened to JP Morgan, recently, when the London Whale got caught. As soon as Jamie Dimon was forced to admit a $2 billion loss, the sharks realized they were vulnerable and came in to attack. That has greatly magnified the size JP Morgan’s loss. The last thing powerful entities want to see is for this to occur in the gold and silver markets.”
So while the paper price is "hit" someone is going in to buy massive amounts of gold and silver using the reduced spot price to lock in orders to be delivered. Further, the metal is not available and banks and likely the gold exchanges like COMEX are scrambling to fill the orders. Once again, this likely explains why the Swiss are working around the clock because demand for physical gold is so massive.
Central Banks, especially in the East where gold is seen as a store of value and not just a "barbaric relic" are buying up gold by the tons. This is essentially, it would seem a "run on the banks" but not just any banks, its on the central banks of the West and the bullion banks. A much more frightening notion than a run on your local bank. This may likely reflect a complete loss in confidence that the Euro can avoid a collapse and that the US dollar can keep anything near its current value........and its accelerated in recent weeks as if they are seeing a sense of urgency. And remember, the paper to physical lever age is about 100 to 1!!! So every ton of physical gold that China takes delivery of, you have 100 tons of paper gold not backed by anything. That's what really has my attention this weekend as I write this.
Perhaps they are looking to the June 17th elections in Greece as deadline. Failure to form a government again after the just recent election may mean that Greece is not "salvageable" and may start a similar, but much worse cascade, to what we saw when Lehman failed.
Perhaps this explains why Fortress Paper Ltd. announced a "material banknote order reinstated". Printing new Drachmas for Greece?
Of course, I could be completely wrong about the timing. Its true I have been amazed at just how long the central planners have been able to keep the status quo going. But if economic history teaches us anything its that markets are like the ocean tide. Central Banks can implement policies that may slow the tide of free markets like a sand castle, but never stop it. You cannot keep printing and adding new debt without inflation and higher interest rates...eventually.