Gold & Silver Price Takedown – Noise vs Facts: iShares Silver Trust, SPDR Gold Trust, ProShares Ultra Silver
Gold Silver Worlds: As from its inception, the aim of Gold Silver Worlds has been to focus on the real facts. Readers should understand what caused the price take down on Friday February 15th 2013 and should be able to distinguish the noise from the true facts that the mainstream press attributed to the lower gold and silver prices. In this article, we show the real value of the biggest recent headlines and urge readers to value them for what they are: mainstream headlines. We also show the real reasons for the price drop. To get a flavour of the real facts, readers should look at this CNBC video which says it all.
Negative mainstream sentiment
Interestingly, the downward pressure on gold and silver prices came exactly on the day of the G20 meeting in Moscow. Coincidentally, all news out of Moscow was positive and economic recovery appeared to be the theme of the day. Ben Bernanke admitted that the US unemployment was still high, but emphasized that the US economic recovery is underway and that it would lift the global economy up. “As a consequence,” sentiment for gold turned bearish… at least, that’s how the mainstream linked the two events together. One of the many headlines reads “Gold dips to 6-month low as Bernanke says U.S. economy is improving.”
Furthermore, an “exclusive” headline on Reuters (source) reported that the US sanctions to eliminate the gold flow from Turkey to Iran. The significant increase of gold as an “alternative” payment method in the “gold for gas” and “gold for oil” transactions are the result of past year’s sanctions to exclude Iran from the international payment system.
Looking from the opposite perspective, Jim Sinclair (one of the most successful people in the gold business since the 70′s) commented as follows on JS Mineset:
The operation in gold is the same day after day. They are so blatant that the gold banks can teach the gold world a lesson on who is in charge. It is totally obvious. In 2500 years, gold has squashed those that thought themselves more powerful than the laws of nature, which is the basics for economics.
Related to this matter, a Petrogold system could already be underway. Furthermore, the rumours that QE was about to end this year were invalidated by Michael Pento (PentoPort) who has established a proven track record. He wrote:
Since the Fed is NOT anywhere close to raising interest rates or reducing its bond purchases [as confirmed "between the lines" by Fed Vice Chairman Janet Yellen in a speech to the AFL-CIO this week], this should also allay fears that the U.S. dollar is about to enter into a secular bull market. The greenback is just about unchanged on the DXY over the past 12 months and has been mostly range-bound between 79 and 81 during that timeframe. There isn’t any evidence that the USD is ready to soar in value against our six largest trading partners. Without a new bull market in the U.S. dollar, the price of gold cannot enter into a secular bear market.
Our message is to be careful with the negative comments. It is common knowledge that the mainstream media and financial markets are characterized by a herd mentality. This negativity does not come as a surprise. The Hulbert sentiment was flashing a significant low in gold as we mentioned earlier. Be careful not to be caught with the herd when emotions are at extremes.
Are Soros and PIMCO truly bearish?
Furthermore, Soros and PIMCO were given big headlines, adding to the negative sentiment. CNBC wrote: “George Soros and Pimco Turned Bearish on Gold”. The facts? Well, in the fourth quarter of 2012 they reduced their paper gold holdings.
Let’s be clear here: there is no explicit link between reducing gold holdings and being bearish. Obviously, it couldbe the reason, but totally different motives could be at play. As we wrote back in August, Soros e.a. had been accumulating gold in May at the lowest price points of the year. So taking a profit of some 15% (our best guess) as an institutional investor is normal. Besides, even more importantly, Frank Holmes points out that “Soros may have liquidated his gold holdings because he identified a significant short-term opportunity in the currency markets.” It is simply not known. Frank Holmes wrote:
George Soros seemed to anticipate the effect that Japan’s government policies would likely have on the velocity of money. This turned out to be a brilliant move, as “wagering against the yen has emerged as the hottest trade on Wall Street over the past three months,” says the Wall Street Journal. The newspaper reported that Soros gained “almost $1 billion on the trade since November,” during a time the yen declined nearly 20 percent in four months.
Our message is the same: be careful with interpreting the headlines and distinguish facts from noise. Do not get confused by the interpretation of a fact.
Disconnect between physical and paper markets reaching extremes
The core of the explanation why gold and silver prices have come down was related to futures trading. We explained only a week ago in “Short Term Gold & Silver Price Forecasting” that the open interest, especially in silver, was too high for a price rally to occur (courtesy: Precious Metals strategist K. Xeroudakis). The gold and silver paper market pointed to downside pressure. The latest futures market report showed an open interest in silver of approximately 152,000 contracts (which equals more than 26k tonnes). As explained in our aforementioned article the current open interest is flashing that a short term price decline was very likely.
From a technical point of view, the short term picture for gold and silver does not look really well. Both metals have broken their 50 day moving average and a “death cross” is very close. It implies more downside should be expected. Again, those are indicators used in short to mid-term trading. Mind the irony in our statement: trading the “metals” … in the paper market.
Make no mistake, the futures market is a purely paper based market and is almost exclusively accessible for institutional investors. The contrast with the physical market is reaching extremes and is now very blatant. We reported a continuing increase in investment and central bank physical gold demand and historically high Gold and Silver Eagle sales.
To illustrate this, we point to Jim Sinclair who said: “How in the world do you take down at the same time in the same place every day when liquidity is the lowest in true liquidation of physical hold investment positions.” Additionally, Darryl Schoon wrote an excellent article about the gold cold war, in which he explains the massive physical gold buying in the East versus the trading of paper gold in the West.
The real gold investors are not selling. The traders are selling; those are leveraged speculators focused on the short term price. Individual investors, buyers of gold in the past years, and my clients are buying for gold for his store of value. They see this price correction as an opportunity to buy more. They do not care about the short term market noise.
Please do not get confused by the current gold and silver price signals. They are coming primarily from futures traders. If you are a believer in the fundamentals of gold, you should really not care about temporary downside pressure and negative media sentiment.
In closing, we should mention Ted Butler’s view. In today’s update to his premium subscribers, he wrote the following quote which summarizes his outlook. As we all know, his primary focus is on the COT analysis (futures market).
“The truth is that Friday’s high volume price decline, accompanied by a price penetration below two very round numbers ($1600 and $30), had all the makings of a final clean out.”
Ted butler pointed to the fact that the same institutions that cause large volume selling are buyers on those big down days. Mind that trading game. For detailed analysis on Ted Butler’s view on the gold and silver price decline and the prospects of the metals (short, mid and long term) we encourage readers to subscribe to this excellent service on Butler Research.
This article is brought to you courtesy of Gold Silver Worlds.
ETF DN Related: iShares Silver Trust (NYSEARCA:SLV), ProShares Ultra Silver (NYSEARCA:AGQ), iShares Gold Trust (NYSEARCA:IAU), SPDR Gold Trust (NYSEARCA:GLD).