On January 17, 2014, we explained “The Hows and Whys of Gold Price Manipulation.”http://www.paulcraigroberts.org/2014/01/17/hows-whys-gold-price-manipulation/ 
In former times, the rise in the gold price was held down by central banks selling gold or leasing gold to bullion dealers who sold the gold. The supply added in this way to the market absorbed some of the demand, thus holding down the rise in the gold price.

As the supply of physical gold on hand diminished, increasingly recourse was taken to selling gold short in the paper futures market. We illustrated a recent episode in our article. Below we illustrate the uncovered short-selling that took the gold price down today (January 30, 2014).

When the Comex trading floor opened January 30 at 8:20AM NY time, the price of gold inexplicably plunged $17 over the next 30 minutes. The price plunge was triggered when sell orders flooded the Comex trading floor. Over the course of the previous 23 hours of trading, an average of 202 gold contracts per minute had traded. But starting at the 8:20AM Comex, there were four 1-minute windows of trading here’s what happened:

8:21AM: 1766 contracts sold
8:22AM: 5172 contracts sold
8:31AM: 3242 contracts sold
8:47AM: 3515 contracts sold

Over those four minutes of trading, an average of 3,424 contracts per minute traded, or 17 times the average per minute volume of the previous 23 hours, including yesterday’s Comex trading session.

The yellow arrow indicates when the Comex floor opened for gold futures trading. There was not any news events or related market events that would have triggered a sell-off like this in gold. If an entity holding many contracts wanted to sell down its position, it would accomplish this by slowly feeding its position to the market over the course of the entire trading day in order to avoid disturbing the price or “telegraphing” its intent to sell to the market.

Instead, today’s selling was designed to flood the Comex trading floor with a high volume of sell orders in rapid succession in order to drive the price of gold as low as possible before buyers stepped in.

The reason for this is two-fold: Driving down the price of gold assists the Fed in its efforts to support the dollar, and the Comex is running out of physical gold available to be delivered to those who decide to take delivery of gold instead of cash settlement.

The February gold contract is subject to delivery starting on January 31st. As of January 29th, 2 days before the delivery period starts, there were 2,223,000 ounces of gold futures open against 375,000 ounces of gold available to be delivered. The primary banks who trade Comex gold (JP Morgan, HSBC, Bank Nova Scotia) are the primary entities who are short those Comex contracts. Typically toward the end of a delivery month, these banks drive the price of gold lower for the purpose of coercing holders of the contracts to sell. This avoids the problem of having a shortage of gold available to deliver to the entities who decide to take delivery. With an enormous amount of physical gold moving from the western bank vaults to the large Asian buyers of gold, the Comex ultimately does not have enough gold to honor delivery obligations should the day arrive when a fifth or a fourth of the contracts are presented for delivery. Prior to a delivery period or due date on the contracts, manipulation is used to drive the Comex price of gold as low as possible in order to induce enough selling to avoid a possible default on gold delivery.

Following the taper announcement on January 29, the gold price rose $14 to $1270, and the Dow Jones Index dropped 100 points, closing down 74 points from its trading level at the time the tapering was announced. These reactions might have surprised the Fed, leading to the stock market support and gold price suppression on January 30.

Manipulation of the gold price is a foregone conclusion. The question is: why is the Fed tapering? The official reason is that the recovery is now strong enough not to need the stimulus. There are two problems with the official explanation. One is that the purpose of QE has always been to support the prices of the debt-related derivatives on the balance sheets of the banks too big to fail. The other is that the Fed has enough economists and statisticians to know that the recovery is a statistical artifact of deflating GDP with an understated measure of inflation. No other indicator–employment, labor force participation, real median family income, real retail sales, or new construction–indicates economic recovery. Moreover, if in fact the economy has been in recovery since June 2009, after 4.5 years of recovery it is time for a new recession.

One possible explanation for the tapering is that the Fed has created enough new dollars with which to purchase the worst part of the banks’ balance sheet problems and transfer them to the Fed’s balance sheet, while in other ways enhancing the banks’ profits. With the job done, the Fed can slowly back off.

The problem with this explanation is that the liquidity that the Fed has created found its way into the stock and bond markets and into emerging economies. Curtailing the flow of liquidity crashes the markets, bringing on a new financial crisis.

We offer two explanations for the tapering. One is technical, and one is strategic.

….read the two explanations HERE

Random thoughts about the year ahead

1) The monetary backdrop continues to be very different in the US today than it was in earlier post-bubble periods. This is slowing the corrective process and introducing new price distortions that will have to be ‘resolved’ via another devastating economic bust. When will they ever learn?

2) Economic declines will become progressively more serious and economic recoveries will become progressively weaker until there is wide recognition that the central bank is a big part of the problem as opposed to part of the solution.

3) At this time last year, we wrote: “It has become clear that the Fed’s policy of throwing new money at the economy in a horribly misguided effort to generate real growth is not only going to continue in 2013, but also going to be applied more aggressively than was the case in 2012. This money-pumping could prevent widespread recognition of recessionary economic conditions for several more months, but only at a substantial long-term cost. For an economy to function efficiently, price signals must be genuine; that is, price signals must accurately reflect sustainable consumption and production trends.“

The Fed is now beginning to slow the pace of its money-pumping, but the damage has been done. The seeds of the next economic bust have been sown.

4) The economic data will probably be OK during the first few months of 2014, but if commercial-bank credit growth continues at its present slow pace then by the third quarter of this year there will probably be enough stock market weakness and enough signs of economic deterioration to prompt the Fed to step away from its “tapering” plan. 

5) At the beginning of 2013, we wrote: “China has huge economic problems, but these problems will come to the fore gradually over the space of a few years and won’t likely be the cause of big moves in global financial markets during 2013.” The same statement applies to this year.

6) At the beginning of 2013 we thought that the euro-zone’s government debt disaster would return to “Page 1” during the second half of the year. It didn’t. Another euro-zone banking/debt crisis is inevitable, but there are currently no signs that it is imminent. For example, the yield on 10-year Spanish government bonds is near a 5-year low and the EURO STOXX Banks Index recently made a 2-year high. We will monitor European bonds and bank shares in an effort to determine the timing of the inevitable crisis. All we can say right now is that it probably won’t happen during the first half of 2014.

7) Last year we thought that unexpected weakness in the US economy was an intermediate-term threat worthy of attention, but not one of the top three risks. Unexpected weakness in the US economy is now one of the top three risks, although it is a risk that probably won’t materialise until the second half of the year. 

8) As 2013 got underway we considered greater instability in the Middle East to be one of the biggest intermediate-term risks facing the financial markets. We also thought that if this risk was going to materialise it was more likely to do so during the second half than the first half of the year. Our reasoning was that the US government (by far the greatest threat to world peace) would be more inclined towards aggressive military intervention in the Middle East after it became clear that the US economy had sunk into recession, something that was unlikely to happen prior to the second half of 2013. To further explain, governments tend to view external threats as useful distractions during periods of economic weakness. Additionally, in a world dominated by “Keynesian” policy-makers and political advisors, large-scale military action can be perceived as a convenient excuse for more government spending and more monetary inflation.

The threat that the pot of territorial disputes, religious hatreds, political grievances and economic problems known as the Middle East will boil over is ever-present. However, with a deal now in the works regarding Iran’s nuclear program, with the start of the next US recession still lying more than 6 months into the future and with US mid-term elections scheduled for this November, the next Middle East ‘boil over’ of global importance is probably not going to happen in 2014.

9) Last year we wrote: “There’s a new big intermediate-term risk facing the financial world as 2013 gets underway: the risk that the government bond bubble will burst. The bursting of the government bond bubble is a more pressing concern today than it was, say, 6 months ago due to the immense political pressure being put on the Bank of Japan (BOJ) to reduce the purchasing power of the Yen.“

The government bond bubble probably did burst last year, but the other financial markets took the first phase of the new secular bond bear in stride. Furthermore, despite the actions taken by the BOJ to bring about higher “inflation” in Japan, the JGB market recovered from a sharp April-May sell-off to end the year with a gain. That is, the JGB yield was lower at the end of the year than at the start of the year.

Even though a secular bond bear has probably begun, for the reasons outlined in our 20th January commentary we don’t perceive much intermediate-term downside risk for US Treasury bonds. In fact, we suspect that the T-Bond market will end 2014 with a gain.

There is a lot more risk in Japanese Government Bonds. This is mostly because they have a much higher valuation (lower yield), but it is also because the JGB market is much further along in its long-term topping process. 

10) Due to the downward trend in the US monetary inflation rate and the valuation-related downside potential in the US stock market, a US deflation scare is a realistic possibility for the second half of the year.

11) For speculators in commodities and commodity-related equities it will be much easier to make money on the ‘long’ side during 2014 than it was during 2012 and 2013. This is especially so for the year’s first half (the second half could contain a deflation scare) and for speculators in gold and gold-related equities.

The above is excerpted from a commentary originally posted at www.speculative-investor.com. To view their services go HERE