The Beating Down of Gold

If gold should have a collective memory, it will know all about being beaten. For many thousands of years, that is what has commonly being done to gold. Sometimes it just got beaten with hammers all day long, to produce the gold leaf that lined statues of gods and the walls or roofs of places of worship – showing the reverence for gold that is typical of ancient peoples, if not still in many places today – while on other occasions it first went through the smelting ovens to be cast into shape before it was beaten to the desired form.

On Friday in New York this age old practice was continued in modern form, when the gold price was beaten down by over $20. Figures released by the US Labour Department showed that there was an increase in employment that could be the first sign that there is a real change for the better in the ‘jobless recovery’, a main theme of many speculations in the financial media over recent months as historians pointed out that there has been no lasting recovery in the US economy without an early improvement in employment.

The markets turned euphoric on ‘definite signs’ that the recovery is picking up speed and that, of course, is bad for gold. Given near record levels of open interest, any attack on gold through heavy selling on Comex is bound to have a disproportionately large effect – which we saw in a near $20 decline in the gold price from $384 to $365, at one stage. It means that a lot of people with long positions on Comex are taking strain, if they had not already joined the exodus from the market to avoid paying more margin as the positions go under water.

The question now is whether this is the start of a new and sustained slide in the price of gold or whether it will prove to be merely a temporary setback in the current bull market.

Technically, the bull trend is still intact with support around or just below $360, which was not really challenged during the sell-off. Secondly, gold closed above $369 in New York, which already shows a better than $3 recovery during the latter part of the trading. This morning in Asia gold traded above $372, to add another $3 to the move higher – a good sign, since Asia was closed during the late-sell-off in New York and could easily have been panicked into selling mode. However, demand out of India is reported to have been strong, even at the $384 level, so that $370 gold should seem like a bargain.

Panicked sell-offs work if supply can match or exceed demand, but not when total demand is substantially higher than what is available, so that buyers are competing all the time – in which case the need to obtain gold takes precedence over a strategy of stepping away from the market in the hope of a lower price later.

Finally, a closer look at the figures behind the announcement of 57 000 new jobs shows that the facts conceal more than the big fanfare reveals. For example, the announced and official figure is that a net total of 57 000 Americans found jobs during September. Yet it is hidden in the tables that the percentage of Americans that are employed fell to 66,1% – the lowest since 1991. At first glance, these conflicting figures – one stating that the number of people employed surged by 57 000 while the other states that the proportion of employed is at a 12 year low – only makes sense if there was a massive baby boom during September or if a large number of previously illegal immigrants registered during September as residents. Neither of which is the true reason, of course; what happened is simply that manipulation of the figures for ‘seasonal variations’ result in all kinds of very strange statistics.

The un-adjusted numbers for August and September shows that the number of employed Americans declined from 138,137,000 to 137,731,000 – for a loss of 406 000 jobs. Yet at the same time, the number of unemployed also declined, from 8,830,000 to 8,436,000. One might wonder how the working population and the unemployed can decline by a combined 800,000 – but the explanation is not that some deadly epidemic is raging in the US, unseen and unreported, causing many deaths. It is merely that when the unemployed are no longer eligible to benefits they are also no longer counted as unemployed. They drop right out of the statistics!

Strange numbers, but it does not remove the fact that according to the preliminary official announcement 57 000 more Americans are at work – subject to revision, of course – and good enough to boost Wall Street, trash the US bond market and send gold into a spin.

Speaking of revisions, according to Reuters the same Department of Labour that could wave the magic wand of seasonal adjustments to conjure up an increase in employment from the statistics mentioned above, has announced that they are changing the number of employed as reported for the March reference month. The revision is for a total number of employed that is now 146 000 fewer than was reported earlier for the period ending 6 months ago. Note that the revision to the previously reported figure is substantially larger than the preliminary number of the new increase in employed.

Another discrepancy flows out of surveys that contribute to these statistics on employment – one among businesses who then report their payroll figures and one among households. According to the former, since 2001 there are 1 million fewer people employed, while the household survey shows a gain of 1,4 million jobs. Economists were hoping that the final revision for March would show a substantially larger figure for the employment so as to close the gap between the two surveys, but now the gap has worsened!

Strange that with such discrepancies observers get excited when the weekly jobless rate is 399,000 – as it had been for two weeks in a row quite recently – since it is below the 400,000 level that is said to mark the transition from an expanding to a contracting labour force.. Or perhaps it is just that people interpret the statistics to extract whatever meaning and spin they would like to assign to the figures.


The implications

What does this have to do with gold?

The main question regarding gold is whether this decline will be temporary or not. That will depend to some degree on the economic reports over the next week or two.

It is evident that much is being done to put positive spin on the data that describe the US economy in order to support Wall Street and the bond market. Then, like on Friday, when the gold bulls have been anxiously watching gold for some time with the price trapped in the low $380’s and not going anywhere, news that gives a boost to the euphoria regarding the economy offers an excellent opportunity to trash the gold market.

This is achieved through heavy selling of futures on Comex in the hope that the bullion market will also draw sellers who no longer want to hold gold.

However, given that demand for bullion almost certainly has been outstripping demand by some margin for a long time, with circumstantial evidence that the margin is growing wider all the time, the question of what will happen devolves down to whether buyers of gold are speculators or whether they are in for the long haul.

Speculators who are holding gold would turn sellers along with what is happening on the futures market, while speculative buyers would flee the market until the price of gold has fallen far enough and spent some time in consolidation to show support is developing.

Investors who want to hold gold for the long haul will be faster to respond to a lower gold price; if they had been buyers at $380+ they will see a buying opportunity when the price of gold drops below $370 – the more so if the majority of demand is from investors and not from speculators. Then supply would not really increase meaningfully during the sell-off and buyers would still be competing for bullion.



We will learn more about the fundamentals of the gold market through the way the gold price behaves over the next week or two. If the price hovers around the $370 level, only to go nowhere or even resume the decline on any bit of adverse news, we will know that the bullion market – which in the final resort determines what happens to the gold price, depending on the balance between demand and supply – is a speculation-driven market and that the likelihood of it breaking well above $400 is rather remote.

On the other hand, if the gold should continue higher following the spike down to $365 and the minor recovery already taking place at the time of writing (gold at $372,75) then it will be evidence in support of an investor-driven market, with demand outstripping supply to some degree – sufficient to result in keen competition among buyers for scarce supply. This would imply that buyers will use the opportunity by sell-offs such as that on Friday to pick up gold at bargain prices.

If the gold price recovers above $380 to move higher within a matter of days rather than weeks, as before , it will indicate the competition between buyers is increasing; either because of reduced supply or because of greater buyer interest, or as a combination of the two factors. The faster the recovery back to above $380, the greater the disparity between supply and demand and thus also the greater the probability that once on its way higher the gold price could continue beyond $400/oz

So far, still early on the first day of trading following the sell-off and before US markets have opened to take the gold market back to Friday’s killing ground in New York, the way the market is reacting reveals that there is long term investor support; there is little or no heavy and sustained selling of bullion by speculators, rather the opposite.

If the buying through Asian and Indian trading can carry through to New York, many of the shorts of Friday would have to scurry to reduce or even close their short exposure – thereby to provide further support for the bullion market.

It will be an interesting week or two.