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You couldn’t really miss THE event of this week, as the gold price nosedived on Tuesday, taking out the psychological support level at $1300/oz, but also the technical support levels around the $1280 mark. Subsequently, towards the end of the week, the powers that be also tried to take out the perhaps stronger support level located at the 200 moving average, as you can see on the next chart.
Source: stockcharts.com
It’s pretty clear something ‘fishy’ was going on, as Andrew Maguire, a well-known precious metals trader immediately confirmed the total volume of the crash was very suspicious as in excess of 1,000 tonnes of paper contracts were dumped on the market in a matter of hours. Yes, that’s approximately 1/3rd of the entire world’s annual gold production from mining activities, so yes, it’s obvious this isn’t normal trading behaviour.
What makes the drop even more interesting is that it happened on a Tuesday, right after the bank holiday in Germany (the financial markets were closed in Germany on Monday). Could this indicate certain market parties were expecting to see a solution for troubled Deutsche Bank during the long weekend? Nothing materialized even though Deutsche Bank will very likely need to raise more capital, and rumors about a semi-bailout by other German large companies started to circulate later in the week. So whacking down gold might indeed have been some sort of pre-lude and part of the global idea of a monetary reset or a bailout of Deutsche Bank. Because let’s be fair, it’s just ridiculous to see 1,000 tonnes being dumped on the open market on a day when the Chinese markets (and the Shanghai Gold Exchange) were closed…
And indeed, our hunch was confirmed when Qatar announced on Friday it was considering taking a massive equity stake in Deutsche Bank, so this adds credibility as to why the gold price was pushed down on Tuesday, rather than on Monday.
But then the main question obviously remains, who sold? Because if one thing is clear, the futures market crash was NOT caused by sellers of physical gold. We pulled up the data from the SPDR Gold Trust (GLD), and between Monday and Thursday’s closing bell, the total amount of gold owned by the Gold Trust fell by just 10,000 ounces of gold. That’s 0.3 tonnes of gold, and just 0.03% of what has been sold on Tuesday in the paper markets. But the biggest surprise occurred on Friday when during an off-day in excess of 360,000 ounces were added to the inventory.
Once again, if this doesn’t smell fishy, we have no idea what would!
We are pretty sure the Chinese and the Russians will be really grateful for this opportunity to add more physical gold at a multi-month low price. Let’s forget about the Chinese for a minute and zoom in on the Russian stance. As you can see on the data of the International Monetary Fund (IMF), Russia has continued to purchase more physical gold to its balance sheet every single month this year.
Source: IMF data
Not only is this remarkable considering the country’s public finances are in a bad shape due to the oil price crisis, it’s really interesting to see the decline in the price of the yellow metal is going hand in hand with a sharp increase of the oil price:
Source: macrotrends.net
Whereas the gold/oil ratio was almost 40 in January (which means you needed 40 barrels of oil to purchase on ounce of gold), this has now decreased to approximately 25. This means that an oil-dependent country willing to increase its precious metals position by spending the hard dollars it earns from its oil sales now has to sell 40% less oil to afford the same amount of gold. Or, differently: the gold purchasing power of a country like Russia has now increased tremendously, and we wouldn’t be surprised at all if Russia will add a million ounces to its balance sheet in September and October combined. After all, the country’s export numbers will increase dramatically as every $1 oil price increase increases the incoming cash flow by $150M per month (using the current data confirming Russia exports approximately 5.5 million barrels of oil per day).
Long story short, nobody knows who has been selling, but you can be pretty sure our Chinese and Russian friends will take advantage of this opportunity!
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