Saturday, May 4, 2013

The Gold Massacre of 2013

I've been busy the last several weeks and so have not posted since the April 12th & 15th historic sell off in gold. Today I can look back with a little perspective. It inspired me to reread a post from February of 2012 when I wrote The Gold Leap Year Massacre. In that event gold sold off 5% in one day. It was a huge move but not unprecedented by historical standards. I wrote back then:

I looked at the prices of GLD, the exchange traded fund that matches the price of gold, going back to 2004. When I examined the daily moves in percentage terms I found there were many times, most notably in 2008 during the financial crisis, where large moves occurred both down and up. Let’s look at some of these moves in relation to today’s move:


As you can see, in 2008 we had large moves both directions. The large down days in 2008 were thought to be large hedge funds that sold gold ETF’s to meet margin calls when all other assets other than T-Bills were declining in value.

That’s not to say that today’s move wasn’t important. Today’s move was almost four standard deviations. Using the data going back to 2004, the standard deviation, which measures volitility is 1.35%. Three standard deviations would be plus or minus 4% on any given day.  In a standard normal distribution, 99% of all outcomes would fall within three standard deviations. So, four standard deviations should be extremely rare.

Given the historic events of 2008 its not surprising that we would see this kind of “tail risk”. After all, the entire world financial system was on the precipice. But what about today? Certainly much of the problems in banking still exist and many problems have been kicked down the road. But not even the gloomiest among us would say that on February 28th, 2012 we were about to see the world financial system collapse on this day. Was there any major market making news today? Well, Ben Bernanke did say we had a slow to moderate recovery. Not exactly earth shattering news.

This time gold sold off 5% on Friday April 12th and 10% on April 15th. Just like last year, there was no macro economic reason for the sell off. Instead, it was likely due to a failure to deliver gold on either the COMEX or LBMA. The paper price was pushed down to discourage anyone who might have been thinking of taking physical delivery. In addition, consider that the gold ETF GLD holds hundreds of tons of gold. A sharp sell off allows that gold to be removed from the ETF and used for delivery by the COMEX or LBMA. You may be wondering, "How can that be? I thought GLD didn't actually hold any physical gold?" The answer is that GLD most certainly owns some physical gold. I don't know if its 100% or 10%. The point is, when the spot price in gold declines, traders sell GLD and this frees up at least some amount of physical gold.

But a remarkable thing happened after the sell off. All around the globe people have been lining up at shops to buy physical gold. People around the world have rejected the idea that gold lost 15% of its intrinsic value in just two trading days. Via Zerohedge:

The HAA is a large precious metals bullion dealer that gives the retail investor access to an institutional-grade platform for purchasing, storage, and delivery.

Savneet:  It’s tremendous. On Friday and Monday we had the two largest days of selling. We at GBI had some of the biggest days of all time. We had four to five times as many buy orders and sell orders, both in number of trades and in volume. Far more significant buying than selling, and it’s continued throughout the week. Buying has been just tremendous on the gold side. It’s been robust across markets – both in the United States and also in our overseas locations. It’s been consistent across the board.

It’s also representative across all of our dealers. When we surveyed our dealers to get their feelings on what’s happening, it’s been off the charts. Our refiners had two times as many orders as they usually do. Our bullion dealers had, on average, three to five times as many orders as they normally do. Our bullion banks had the same type of positive inflows verses outflows.

Ed:  That’s the same with the Hard Assets Alliance. We’ve seen record inflows of cash deposits over the last two weeks, and purchases have far outnumbered – basically nine-to-one at the Hard Assets Alliance for purchases verses sales of positions.
And from Bloomberg:


U.S. Mint Sales of Gold Coins Jump to Highest in Three Years

Sales of gold coins by the U.S. Mint rose to the highest since December 2009 after the price of the metal in April fell the most in 16 months.
Last month, sales totaled 209,500 ounces, up from 62,000 ounces in March, data on the mint’s website show. The amount for December 2009 was 231,500 ounces. Silver-coin sales rose to 4.2 million ounces from 3.36 million in March.
Demand surged at mints from Australia to the U.K. and the U.S. after futures slumped 13 percent in two days through April 15. Gold futures tumbled 7.8 percent last month and dropped into a bear market as some investors lost faith in the metal as a store of value. Perth Mint, which refines almost all of the nation’s bullion, said that demand jumped to the highest in five years after prices plunged, with the factory kept open through the weekend to meet orders.
“People are flocking to buy physical gold,” Todd Dutkevitch, a senior account executive at Los Angeles-based American Bullion Inc., said in a phone interview. “The price drop has made it possible for many retail buyers to add gold.”

And this is remarkable:

In Australia, buyers were waiting in lines half a kilometer (0.3 mile) long to get minted coins, and jewelry shops in India and China ran out of gold in a single day, Jason Toussaint, the managing director of investments at the London-based World Gold Council, said in an interview. India and China are the world’s largest consumers of bullion.
Surging demand from Dubai to Istanbul has pushed physical premiums in the region to levels not seen in years as the biggest price slump in three decades lures consumers, according to MKS (Switzerland) SA.

Shanghai Trading

Trading for the benchmark contract on the Shanghai Gold Exchange surged to a record last week, while premiums to secure supplies in India jumped to five times the level before the slump. China and India are the world’s largest buyers.
People recognize that an ounce of gold is still an ounce of gold even when its at a 15% discount in their local currency.

The above describes, in a small way, how paper and physical gold prices begin to diverge. If the paper price is too low, there will be no sellers of PHYSICAL GOLD. Remember, this is the main thing separating the physical gold market from ALL paper markets, including the stock market. Bernanke can print more dollars, which inflate stock prices, but he cannot print more physical gold,

No comments:

Post a Comment