Peter Brimelow: Battered gold bugs still defying bear raid

The smackdown was engineered to have the greatest effect and was not centered on profit by virtue of the sales occurring in the least liquid market. The objective was to generate panic selling to maximize the damage to the gold price. In doing so, the restriction to physical gold flow was lessened in the face of increasing demand. Predictably, the demand for physical was robust and much buying in Asia was observed. Objective met: physical gold flowed to where it is wanted and needed, Asia, from where it not needed and is marginalized, the west.

This whole operation simply extends the charade where the world pretends that the global reserve currency has enough confidence that it can effectively store value. The real value is being slowly and surely absorbed by physical gold, with the dollar holding a portion of value. As confidence wanes and leverage is removed from the paper gold markets, the portion of value held by gold increases and decreases in the dollar. Ultimately in a pure cash market for gold, no leverage through supply of paper gold, all value will be held by gold., Freegold.

At that point, it will behoove a central bank to hold their gold as a reserve asset, not a reserve currency. To make it an asset and not a currency it has to be sequestered away and not used as a base for fractional reserve lending. In doing this, the bank will bolster the value of their reserve asset that can balance it’s liability in the form of paper currency. The price of gold will float in response to supply of fiat currency that will be determined by the treasury and the Fed.

When the supply of fiat is constrained, the price of gold will trend lower and like today in paper gold there will be a flow of stored value from gold to paper, looking for capital appreciation. This flow will effectively bolster paper assets and lead to a situation where capital is available for fractional lending and the expansion of credit.

As the above cycle matures, too much currency will be created as it is now created, from nothing via the magic of fractional reserve accounting. When this occurs, the price of gold will begin to rise and it will attract hoarding. Gold always functions in this manner where an increasing price attracts both speculators and seekers of safe haven.

To purchase gold, dollars must be used and removed from the circulation, creating a flow of value out of fiat paper back into gold. Capital will flow away from currencies that are experiencing devaluation against gold in favor for currencies that are stable or strengthening against gold, as well as physical gold itself. This flight of capital will impair the production of new credit through fractional banking and serve initially as a brake to further economic expansion, and finally as device to remove speculative excess from the economy.

In this manner, physical gold held as a reserve asset becomes a neutral mechanism that favors nobody and provides balance that politicians and bankers cannot provide.


By Peter Brimelow
Monday, October 3, 2011

NEW YORK — Gold bugs have been shaken by the size of what they see as a manipulative bear raid, but they still believe that Asian offtake underpins the market.

Gold had been declining for several days, but in the early Asian hours of Monday Sept. 26 it was struck a terrific blow, plunging $130 in a few hours before recovering.

As Australia’s The Privateer noted thoughtfully this weekend: “That plunge … brought the gold price down pretty close to its 40-week (200-day) moving average. Gold hasn’t been below that 200-day moving average by any more than a few [U.S. dollars] since late January 2009.”

The break has provoked a great deal of suspicion. Veteran Ross Norman, now of the U.K. gold-dealing site Sharps Pixley, remarked of the sellers: “Placing such a huge order into the market when the least number of market participants were active tells you that they were out for dramatic effect. Anyone looking to offload significant amounts of metal at the best possible price would have done so when both London and New York were both [open]. … Clearly finessing gold into the market was not their motive — they wanted a statement.”

The plunge has also stimulated some interesting work. Bullion bank HSBC published an essay Thursday saying: “The drop in gold prices last week represented a 3-standard-deviation move, down 8.54%. … This has occurred only seven times since gold became freely convertible in 1972.”

Taking the rather more calming long view, Bianco Research on Tuesday put out a piece noting that, considering the nine major breaks since gold started rising in 2001 in percentage terms, the break from the Sept. 6 $1,924 high to last Monday was the second shallowest, and was less severe than the previous five.

In gold, a $100 move is not what it was!

As usual, the radical gold bugs to be found around the banner of LeMetropoleCafe turned quite cheerful on the break. The Asian physical markets began to show high gold premiums to the world market, indicating import demand, upon which this group sets so much store. By the end of the week, India, China, Vietnam, and Turkey were reportedly in this mode.

Analysts at two bullion banks concurred. On Tuesday Edel Tully at UBS commented: “To be clear, physical demand right now is not just decent, it is exceptionally strong. And while Friday’s volumes mirrored flows not seen since late January this year, demand yesterday was a good deal more impressive.”

Standard Bank noted on Thursday: “Although buying interest out of India has been particularly strong, support is broad-based throughout Asia, with physical demand in places like Thailand and China also rising.” On a year-on-year basis, “current buying momentum is much stronger than the respective comparable periods in 2009 and 2010.”

On Friday “Dave from Denver,” a regular correspondent at LeMetropoleCafe, ventured: “Hate to say the bottom is in, but it sure feels like, barring a complete market collapse, we may have seen the lows in gold/silver.”

A thought shared by the by-no-means-gold-buggish Gartman Letter on Friday: “It does indeed appear that the worst has been seen in gold, and that the panic lows seen Monday in Asian trading have held. … We have weathered the storm.”

The Privateer’s conclusion: “Look upon this correction as an enhanced opportunity to add to holdings or, if you haven’t got any gold yet (why not?) to start accumulating.”

* * *

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