The “gold bear raid” was driven by the TBTF banks in an attempt to amplify their earnings. This is according to a Toby Connor article on Resource Investor. In short, his thesis was that the TBTFs drove the price down so they could buy lower now so they could sell higher later.
Though I do not disagree with Connor’s technical analysis, I think his explanation for why the price of gold plummeted is just too damn complicated. Occams Razor tells us to look for the simplest explanation, and I think there are much simpler explanations than his.
First, the context: the price of gold fell from ~$1800 last October to less than $1300 in June. It’s recovered a bit of that price since then but is still down over 30% from October. The fundamentals for gold haven’t changed.
In general, the main driver of gold’s price – at least in the West – is the expectation of monetary inflation. The main driver in Asia is simple demand .
Since the Fed is still creating $85B in brand new money every month, there is no change in the expectation that the new money won’t end up sloshing into the marketplace. Asians are still demanding gold in quantities that far outstrips supply, so there is no change from that perspective that would drive the price of gold down.
I think Connor overlooks at least two situations that serve as a better explanation for the drop in the price of gold.
In no particular order, they are:
- The disconnect between paper gold and physical gold
- Margin calls on big players
Its well-known that the supply of physical gold implied by the volume of “gold-backed” ETFs far exceeds the actual supply of physical. Nevertheless, paper gold has tracked the price of physical since it was introduced. If a big holder of paper deciding that the spread between implied supply and actual supply was just too big to justify, he might just decide to dump his paper. That could start a drop, which could then be exacerbated by other holders getting margin calls.
Suppose some of those getting margin calls were large holders of gold. Cyprus was proof that the Eurocrats will stop at nothing to keep the big banks afloat. Suppose some big hedge fund was massively short the Euro and massively long gold and found themselves on the wrong side of both those trades when the ECB decided to bail-in Cyprus? Or Portugal? Or Spain? Or Italy?
The amount of gold that was dumped on the market tends to argue that someone was reacting in “panic liquidation” mode, not coolly choosing to manipulate the price lower so they could buy a lot more so they could sell it a lot higher. That’s a cool theory, but it’s just too damn complicated to be believed. I’d put my money on forced liquidation due to margin calls.