“Shanghai Gold will change the current gold market with its ‘consumed in the East but priced in the West’ arrangement. When China has the right to speak in the international gold market, the true price of gold will be revealed.” – Xu Luode, Chairman, Shanghai Gold Exchange, 15 May 2014.
The price of gold has jumped 5.8% in a little over 3 weeks. This is a big move in a short period of time for any asset. Two factors fueled the move. The first is the expectation that Central Banks globally will revert back to money printing and negative interest rate policies to address a collapsing global economy. The second factor, more technical in nature, pushing gold higher is hedge funds chasing the upward price-momentum in the Comex and LBMA paper gold markets.
The gold price was smashed in the paper gold market on Friday right as the stock market opened. 9,816 Comex paper gold contracts representing nearly 1 million ozs of gold were thrown onto the Comex in a five minute period. This is more than 3 times the amount of gold designated in Comex warehouses as available for delivery and 28% more than the total amount of gold held in Comex vaults per Friday’s Comex warehouse report.
Judging from the latest Commitment of Traders Report, which shows the Comex bank net short position growing rapidly, there’s no question that Friday’s activity was an act of price control. Furthermore, it’s common for the price of gold to be heavily managed on summer Fridays after the physical gold buyers in the eastern hemisphere have retired for the weekend. The motivation this Friday is the fact that the gold price had popped over $1350 on Thursday night. For now $1350 has been the price at which price containment activities are readily implemented.
The price of gold is most heavily controlled just before, during and after the FOMC meeting. The next meeting begins tomorrow and culminates with the FOMC policy statement to be released just after 2 p.m. EST. The event has become the caricature of a society that takes official policy implementation seriously. This includes the journalistic and analytic transmission of the event, which is literally a Barnum and Bailey production.
It seems the number one policy goal of the Fed and the Trump Administration is to keep the stock market from collapsing. But the Fed has very few rate cut “bullets” in its chamber to help accomplish this policy directive. Moreover, a study completed by the Center for Financial Research and Analysis showed that the S&P 500 Index fell 12.4% in the first six months after cuts started in 2007. The drop broke a post-World War II record decline of 9.5% set in 2001, when the Fed’s previous series of rate reductions got under way. Declines in the S&P 500 also followed moves toward lower rates that began in 1960, 1968 and 1981.
This suggests to me that the Fed will have to start printing more money. The only question is with regard to the timing. Judging from the steady stream of negative economic reports – a record drop in the NY Fed’s regional economic activity index released today, for instance – it’s quite possible the printing press will be fired up before year-end.
The rapid price rise in gold from $700 to $1900 between late 2008 and September 2011 was powered by global Central Bank money printing and big bank bailouts. We know money printing is on the horizon. But so are bank bailouts – again. The curious and highly opaque announcement that Deutsche Bank was going to create a “bad bank” for its distressed assets, which are losing half a billion dollars annually, suggests that the German Government and/or ECB is prepared to monetize DB’s bad assets while enabling the bank’s basic banking and money management business survive on its own.
This is just the beginning of what will eventually turn out to be a period of epic money printing and systemic bailouts by Central Banks in conjunction with their sovereign lap-dogs. Only this time the scale of the operation will dwarf the monetization program that began in 2008. The price of gold more than doubled with ease the first time around. In my mind there’s no question that the $1350 official price-cap will fail. At that point its anyone’s guess how high the price will move in U.S. dollars. But the price of gold is already breaking out in several currencies other than the dollar.