Gold’s drop from $1562 last Friday all the way to $1321 earlier today is one of the steepest drops in recorded history. Yet pick up a newspaper or turn on the news, and you won’t get one solid answer as to the main question on everybody’s mind: “why exactly did this happen?”. Let us analyze the reasons put forward trying to rationalize this rout in precious metals.
The initial catalyst that sparked this sell-off on Monday is presumably the data coming out China with growth figures coming in lower than expected and other economic indicators signaling a downturn in the Chinese economy. The link of this development to precious metals is simple – China has become of the dominant buyers of gold, and the poor economic sentiment coming out of China is suppose to lead us to believe that their interest in gold will wane. Such analysis fails to understand the reason why gold is popular in China in the first place. Chinese policy makers accumulate gold to transition out of the soon to be worthless USD which they have way too much of, while its citizens love the glitter of gold both as a status-showing jewellery and as one of the lone viable forms of investment available in the country.
So let’s move on to perhaps the most quoted reason for this April 15 gold crash: the ‘economic recovery’. Financial journalists like to throw around this bold statement without having anything to back it up. They can’t back it up because almost every single economic indicator that has come out over the past few weeks has been well below expectations and is essentially proving that there is no economic recovery.
Here’s another funny reason put forward for gold’s recent demise: the claim that monetary easing might be coming to an end. Murmurs coming out of some of the FOMC meetings apparently suggests that some members would like to QE to be scaled down or completely halted. Yet anyone looking at the situation from a mathematical standpoint, or yet just listening to the guy who actually makes the decision (Bernanke) knows that QE can’t just end.
How about the margin calls coming out of Japan and the need to liquidate gold to make ends meet? The volume involved in the gold takedown was way too high for this liquidation to sufficiently explain even a fraction of the damage.
Then there’s my favorite reason, the culprit that began the the sell-off on Friday and started this whole mess to begin with: the rumor that Cyprus might have to sell its gold reserves. So how much gold does Cyprus have you ask? Well apparently they have something like 13.5 tons, and 10 of those tons might need to be sold. Yes, that’s right, just 10 measly tons, an amount China nearly imported per day from HK last month. But then immediately rumors start to spread that perhaps other Mediterranean countries facing trouble might also have to sell of their gold reserves. Not that there is much of a chance that these countries with part with their gold, but even if they did, it would not occur over the futures markets where much of the spot price is decided. Nations do their buying and selling on over the counter markets in London as to not disturb the gold price.
Of course you can’t have a proper gold bash without mentioning that gold has entered a long term bear market. Yes that 10 year bull market is apparently coming to an end because inflation is so under control and economic growth is so guaranteed and everything is just so dandy.
Rounding out the ridiculous statements that have been employed to try to explain this catastrophe are negative quotes by the likes of George Soros who purports that “gold is no longer a safe heaven” (oh how much the media loves that line, you can’t imagine), and also the investment banks like Goldman Sachs who often opportunistically advise their client one thing but end up taking the opposite position.
The real reason why this all happened? Naked short selling of PAPER gold by those that will profit from seeing the gold price fall. At the head of those that would like the gold price to be suppressed is of course the United States, who haven’t been able to make any other economic indicator go their way so the only option left is to suppress the gold price to retain a fake illusion that things are alright.