Saturday, 20 April 2013

Honestly, you don't want to know...

Gold price manipulation reached its culmination on Monday with an over-night low around $1320. The multiyear resistance of gold at $1525 was broken the previous week, triggering the plunge. After a suggestion by IMF president Christine Lagarde, rumours were out that Cyprus was to sell its gold holding in order for the €10 B bail-out loan to be approved. Little imagination is needed to shift focus to Italy: in a political stale-mate and with debt equally spiraling out of control. Contrary to Cyprus, Italy does have meaningful gold holdings, however still only worth a fraction of their outstanding debt.

Far more important than the possible sale of Cyprus' gold reserves is the taxation (you can call it expropriation) of bank deposits in excess of €100,000. When confidence in the banking system is shaken, it requires only little for savers to massively withdraw funds, even without any particular bank going under and facing a bank-run. What's better to spend your cash hoard on than precious metals? Right, that is the kind of idea which isn't allowed to take root. Instead it's all "the gold-bull is over" reported in various phrasing by analysts of Goldman Sachs, JP Morgan and the like and touted by the media without even giving it a second thought. Massaging the opinion of the speculator crowd is what investment- and bullion banks are best at.
After the multiyear resistance was broken, it required only minor orchestrated short selling of futures to make stop loss orders get triggered massively. This accelerated the plunge with ever more leveraged longs forced to sell their futures into weakness. The plunge of precious metals and commodities spilled over into the broad stock market as hedge funds were forced to sell equity to meet margin calls on their under-water positions in crude and metals. With the FED's zero interest rate policy, aiming to prop up the stock market, this is what's called "shooting yourselve in the foot". The 'collateral damage' was to become a major nuissance. Eventually the precious metal selling pressure must subside as stop loss orders are quite widely spaced down there and much more physical buying comes in on the spot market, often quoting considerably above the future price. Well informed shorts know this is the time for covering.

What happened to the miners? Honestly, you don't want to know...
With the HUI index plunging below 300 on Monday, miners continued sliding even as gold started a timid recovery on Tuesday and prolonged their descent to bottom on Wednesday. It's best illustrated by the HUI/Gold ratio, plunging to 0.187 by Wednesday, with the HUI closing at 257. See the Gold Miner Pulse page for graphs. A HUI/Gold relative valuation of 0.187 is not seen since early 2001, at the very waking-up of the gold bull. Despite some recovery, we're still at 0.191, which is considerably below the very bottom (0.207) this relative valuation reached during the 2008 financial crisis. This also illustrates to what extent the short selling of miners can distort the normal functioning of markets.

As for the “contributor driven explorer and junior miner spreadsheet”, here's the verdict: we're down to a 35.21% loss on the list, down 9.6% from the 25.61% loss last week. Only Almaden minerals managed to book a tiny net gain, mitigating its accumulated losses. Several list components made a double digit slide, with Sandstorm gold blowing through much of its accumulated gains and Aurcana nearly doubling its loss. What we were at on Wednesday is beyond imagination. Just consider the list is up 3.5% this Friday at the close with moreover two double digit gains: Atna Res. and Medusa Mining are mitigating weekly losses, rallying to the Friday close.

To end with: A must listen to: A Tale of Two Cities: Physical Gold versus Paper Gold - The real story behind Gold's decline.

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