What Happened to Gold Last Month?

By: Don Davis, Novus Investments, LLC

There have been some very strange developments in the Gold market that investors should be aware of. First, since January inventories of physical gold at major bullion banks, bullion exchanges, and commodity exchanges have been falling steeply, and that decline in inventories began to accelerate sharply in March and after the Cyprus bailout. In late March ABN Amro, the Dutch bank, announced that it was “halting” physical gold delivery on its gold accounts to clients. Customers of this big bank had invested in bullion accounts, but when enough of them demanded the physical gold, ABN had to refuse and offer cash-settlement instead. This was never opted for in the past, as it is essentially a soft form of default, but ABN started the trend in late March, and since, cash-settlement has been opted for by an increasing number of international banks, including some Swiss banks, and by exchanges. At the same time the inventory of gold of these banks and exchanges began to plummet at the fastest rate in history and in unprecedented fashion. Also, if you remember a few months back, Germany request that both France and the US deliver their physical gold (apparently stored in French and American vaults) back to Germany so they could store domestically. After France and the US huddled, then told Germany they will give a portion of it back to them over a 7 year period, or the US also “generously” offered cash-settlement over the same time frame (in freshly printed US dollars of course which the Germans don’t want).

Next, there was purportedly an emergency meeting of key bankers and Obama, called prior to the Cyprus 2nd bailout proposal, including 15 of the top CEO’s of major investment and commercial banks. The next strange development followed, and was revealed on April 10, with the early release of the FOMC minutes on that day. Bloomberg reported that with the earlier than usual release of the FOMC minutes that morning it was disclosed that the FOMC minutes had been “accidentally” pre-released over the prior weekend to a select group of parties on the email list of the largest Washington DC lobby donors that included Goldman Sachs, Citigroup, Barclays, the Carlyle Group, and other key investment banks. US Congressman Grayson pointed out that this FOMC leak stated: “We recommend initiating a short COMEX gold position.” an unprecedented investment recommendation to accompany an unprecedented and illegal pre-release of FOMC minutes. Within days of this prerelease, Goldman Sachs and SocGen issued reports suggesting not only the liquidation of gold, but actually shorting it.

Then came the second bailout proposal for Cyprus, in which Germany required the potential need to dump $6-$9B worth of Cypriot gold on the market to cover the additional bailout short-fall, which led many to wonder if other huge problem EU countries like Spain and Italy, might not be forced to dump their considerably larger gold holdings in similar fashion. The next morning, Friday April 12, the selling began in force with a historically massive 100-ton sell order from a large investment bank. In the words of the CME:

“The gold futures markets opened in New York on Friday, 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract in what proved to be only an opening shot. The selling took gold to the technically very important level of $1,540, which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders’ minds it stood as a formidable support level… the line in the sand.Two hours later the initial selling, rumored to have been routed through Merrill Lynch’s floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tons) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted ‘short sale’, which by driving prices sharply lower in a display of ‘shock & awe’ – would seek to gain further momentum by prompting others to also sell their positions as they hit their maximum acceptable losses or so-called ‘stopped-out’ in market parlance – probably hidden the unimpeachable (?) $1540 level..The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tons of gold futures selling in total equates to 15% of annual gold mine production – too much for the market to readily absorb…”

During this time and the days that followed there was a corresponding increase in the global demand for physical Gold. In the Gold crash of 1980, global demand came to a halt and most were selling physical Gold at the time. This time however, there are currently shortages worldwide in physical bullion especially in the Silver market (try buying a box of brand new silver eagles for immediate delivery).

Investors can make up their own mind on this issue. The good news is that our Novus Precious Commodities program had no exposure to Gold in the month of April, and just a little exposure to Silver, so we only took a small and manageable loss on the crash exiting near the highs, and buying back near the lows. Past performance is not necessarily indicative of future results. The risk of loss exists.

Also, as a reminder, we are a precious metals dealer and offer discounted wholesale pricing as a loss leader to our valued clients. Currently, Gold eagles are in very thin supply, but we have access to large quantities of gold maples, kangaroos, and bars at discounted prices. Most silver in all forms is in very, very thin supply for the next month or so. The best way we recommended trading precious metals is in the futures markets, and the best way we recommend owning precious metals is with physical bullion stored at a private, insured vault. ETF’s like GLD are NOT 100% backed by Gold and are affiliated with heavily leveraged banks who re-hypothecate their assets (gold leasing, etc), which is why they cannot deliver they physicals to you upon request (try calling them to ask).

What happened to gold last month? Past performance is not necessarily indicative of future results. The risk of loss exists.