‘Buyers Scour Asia for Physical Gold’, proclaimed a headline in the Financial Times — in a story buried on page 18, because it relates favourably to gold and gold bugs.
Though it was exiled to newspaper Siberia (Section II, to be precise), the Financial Times article vividly detailed a scramble across Asian markets for yellow metal.
Indeed, per the FT report, ‘Asia is witnessing one of the strongest waves of physical gold buying in thirty years.’The FT article used terms like ‘feverish buying’, as well as ‘gold rush’, just a week after a massive sell-off of paper gold…
News of Asia’s frantic gold buying raises a legitimate question. What happened to the ‘gold is dead’ meme from the week of the crash?
Wasn’t the apparent selloff supposed to mark a turning point for gold? Isn’t the tide receding for what every good student of Economics 101 has learnt is merely a ‘barbarous relic’, per John Maynard Keynes?
Yet strong Asian gold demand is contrary to Western convention. When the price of something falls, goes the rule, it’s because people are selling product, not buying it, right? Then again, what exactly tumbled in price last week?
There’s a new truth apparent in the marketplace. There’s paper gold, reflecting so-called ‘contracts’ that change hands on a trading venue operated by CME Group, called COMEX. And then there’s the real McCoy of physical metal, which trades hands on gold exchanges across the world. These are two quite different things.
Of course, in its recent news account, the Financial Times described the scramble for physical metal. The sense of surprise in the Times — of an overall market disconnect — may be because that newspaper’s celestial view of macroeconomics is fixed upon ‘stars that went dark and cold a decade ago,’ to quote the inimitable Conrad Black.
In other words, the Financial Times has never been much of a trumpet for gold as more than just another asset class, like orange juice futures or real estate investment trusts. You buy gold, sell it, trade it. But there’s no need to take delivery. It’s not as if gold is money, right?
Yet now, when it comes to the market for the real element — atomic number 79 — and holding it in your hand: what do those gold-loving Asians know?
No Fools, Those Goldman Guys
Perhaps the physical buyers, in Asia, were merely ahead of the curve of respectable opinion, so to speak. Because not long after buyers from Mumbai to Shanghai started snapping up gold with complete enthusiasm, the nice people at Goldman Sachs posted the following announcement:
‘We have closed our recommendation to short COMEX Gold, as prices moved above the stop at $1,400/toz. We have exited the trade significantly below our original target of $1,450/toz, for a potential gain of 10.4%. The move since initiation was surprisingly rapid, likely exacerbated by the break of well-flagged technical support levels. Our bias is to expect further declines in gold prices on the combination of continued ETF outflows as conviction in holding gold continues to wane as well as our economists’ forecast for a reacceleration in US growth later this year.’
Oh, you don’t say?
Gold’s Disconnect, and Blowback
When people dumped ‘paper gold’ over the past few weeks — sellers that included the aforementioned Goldman — they made quick gains, but they also committed a strategic error. That is, as people dumped COMEX gold contracts in unison, some apparently engaging in naked shorting, or ‘selling’ gold over which they had absolutely no control. Then came the golden disconnect.
Perhaps initially, the market plan was to break (if not ‘brake’) the rising demand for physical gold, by knocking down the price of paper gold and pocketing a fast gain. It’s like robbing liquor stores, but without having to wear a ski mask. And of course, one should never do anything dishonest unless it’s perfectly legal.
Still, sellers — perhaps unintentionally — triggered a new run on physical gold that shows no sign of diminishing. The new buying spree in Asia appears to be the physical gold blowback. Is this the beginning of the end of paper gold? As gold shines, is paper burning?
A Cross of Paper – Death of COMEX
Just to be clear, sellers drove down the paper price of gold, and inflicted grievous wounds across the rest of the metal space, too — silver, copper, platinum, etc., and almost all of the mining plays.
The pullback was awful, across the overall resource sector. Sellers left proverbial pools of blood in the streets — Wall Street, Bay Street, Howe Street and Main Street. Long-holders got nailed to a ‘cross of paper’, to paraphrase William Jennings Bryan.
But those COMEX contract sellers must not have foreseen that physical demand for gold in Asia (and across the world, truth be told) would spike after a pound-down. Whoops.
Look at it from another angle. There’s no way that any physical gold market — CME Group, especially — can arrange delivery of enough product to cover all the contracts out on the street.
We have a disconnect from the ‘market’ price of paper gold, versus what people will pay for physical metal in the souks of the world.
In this respect, the paper gold market — embodied by COMEX — has been exposed as a mere platform for price manipulation. (Some people might call it a ‘fraud’, but I’m not here to quibble over semantics.)
It’s like Dorothy pulling away the curtain in the Wizard of Oz — a book about the gold standard and bi-metallism, by the way.
Off to See the Wizard
Let me digress for a moment. Author Lyman Frank Baum wrote the original book, The Wonderful Wizard of Oz. The book, published in 1900, was whimsical. But among other things, it poked fun and caricatured the gold and silver debate in the US in the 1890s. More broadly, Wizard was an allegory about life and political populism in the US in the 1890s.
Author Baum had a keen eye for the gold-silver debate because he knew something about the subject. Baum was wealthy, and heir to serious family money that came from the 19th-century oil fields of Pennsylvania. So he took the idea of debased currency and ran with it.
Just look at just the title, The Wonderful Wizard of… Oz, where ‘Oz’ stands for ‘ounces’. I’ve heard that in the real story, the ‘Emerald City’ of Oz was a city of gold. (It became emerald when MGM Studios made the famous Depression-era movie in 1939.) The yellow brick road was a metaphor for gold. Dorothy’s slippers were silver in the book, and changed to ruby in the movie.
The Tin Woodman stood for the urban workers of America, who were left out in the cold and rain by the forces of banker capitalism. The Scarecrow stood for the farmers — and recall that he had no brain, because many East Coast snobs thought farmers were dumb hicks, ripe for the picking.
The Cowardly Lion was a dead ringer for William Jennings Bryan, who made good speeches, but could not stand up to the entrenched big guys.
The Wizard was all smoke and mirrors, reflecting the political classes as a bunch of charlatans who promised much and delivered little.
Hey, Wizard is a children’s story. It’s not a cookbook for what ails us today. If there are any real answers in the book, it’s along the lines that things aren’t what they may at first appear. And the common people — workers and farmers — are smarter and nobler than the elites think.
At the end of the day, COMEX is revealed as just a shadow market. The curtain has been pulled and there’s nothing to back it up. COMEX is okay for ‘trading’ gold, as long as your only goal is cash settlement. But if you want delivery? Real metal? Elemental gold? No way.
Looking ahead, let’s watch what happens. The next step in the paper gold market is to alter the rules for COMEX settlement. I expect to see any semblance of a ‘delivery’ requirement will simply vanish.
The COMEX is just a paper exchange now, with people trading computer code. There’s more ‘real’ economic activity generated by betting on horses, because horses are flesh and blood critters. Now, COMEX gold contracts have turned into something like the stuff that hired hands shovel out of the stables.
The recent gold crash was the beginning of emancipating real gold from paper gold. We’re about to see a ‘real’ price for gold, coming from the bottom up and not the top down. I suspect that we’ll see a solid price rise for gold, over time. The market bullies who deal in paper products have just punched themselves in the nose.
Gold’s Lehman Moment?
The scenario actually reminds me of 2008, when Lehman Brothers crashed and burned. The fall of Lehman set off a modern financial crisis of historical proportions.
The recent crash in the price level of paper gold established nominal prices far below the international physical price. To the extent that COMEX has any product for delivery in the pipeline, this gold price excursion will drain it out. COMEX is toast, at least for gold.
What comes next? Will COMEX be the next Lehman? Will it crash and burn, too? Maybe, but in the end it doesn’t matter if you’ve been buying and holding physical metal — as I’ve been advising for over six years. Or perhaps COMEX ‘gold’ will just fade away, because it has lost credibility as a trading platform. At this stage, who needs it?
Looking for Protection
Still, as the big elephants fight this out, where does the small investor go for investment safety? Well, own physical metal, to the extent you have it and can obtain it. Cash is good, at least in the short term. But cash may not do so well, as the gold price rises in a relative sense.
We also get back to shares in ‘hard asset’ companies — large, mid-sized and (some) small mining firms with high grades, cash in the bank, low costs of production (or a short pathway to production), and cash flow. That, and management that’s not too slow or stupid.
One day, we’ll look back on this period as the Great Gold Train Robbery of 2013. The sellers thought they were getting away with a quick heist — sort of a smash and grab of COMEX contracts. Yet instead, the bust appears to have freed gold from its paper constraints. Looking ahead, gold prices could rise beyond your wildest expectations.
Byron King
Contributing Editor, Money Morning
From the Archives…
The Market Rebounds, but We’re Still Not Selling…
26-04-2013 – Kris Sayce
Is This the Last Hurrah for the Australian Dollar?
25-04-2013 – Murray Dawes
Here’s Proof the Silver Bullion Market is Alive and Well
24-04-2013 – Dr. Alex Cowie
Stand By for the Recession Rally in Resource Stocks: Take Two
23-04-2013 – Dr. Alex Cowie
A New Take on Hard Asset Investing
22-04-2013 – Kris Sayce
