The Gold Mystery

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In wrapping up 2013, I wrote on the day after Christmas that the year ahead “promises to be one of the most dramatic in the markets in our short-term memories.  The stage has been set for some earth-wrenching shifts as conditions that have seemed stable suddenly become unstable.”

To say that events tectonic in scope could be felt in 2014 is not an exaggeration. Enormous pressure is building as incompatible market conditions encounter one another.

Consider what is happening in the gold market.  As we have been reminded in the financial press, gold has turned in its first down calendar year since 2000; its worst year since 1981.

But demand for physical gold is positively booming.  Indeed today, the first trading day of the New Year, while stocks and oil were down, gold jumped on the strength of physical demand from China.

While the price action is noted by the financial press, it misses the significance of the center of action in the gold markets moving away from the West.  A November Wall Street Journal account (one that ran online but didn’t show up in the newspaper itself), noted correctly that global gold trading continues to shift eastward, from New York, London, and Zurich to Dubai, Singapore, Hong Kong and Shanghai. 

This is a movement in the financial world that promises all the impact of geologic plates colliding.

How can demand for gold be booming, while the price has fallen hard?  Is gold production roaring along in overdrive?  On the contrary, gold miners have had to react to the impact of lower prices.  They have cut production, shuttered mines, laid off workers, and cancelled projects.

So what explains the mystery of a depressed gold price even as strong demand for physical gold persists?

At this point, let me bring in James Rickards, the author of the book Currency Wars which I have highly recommended.   (Disclaimer:  Not only do Rickards and I share the same publisher, we also had the same editor.)

In a December 31 Bloomberg TV interview Rickards explained that the gold price decline even in the face of strong demand for the physical metal is very bullish for gold:

The price is going down for some technical reasons, probably manipulation as well.  But the physical demand is through the roof…  The floating supply is disappearing. This gold is coming out of (the ETF) GLD.  They’ve disgorged 500 tons.  It is going straight to China.  It is being put underground and will never see the light of day for 300 years.

You have a paper short balanced on a very small amount of physical gold…

This gold is going to China.  China is redefining the global gold market.  They are making the Singapore Gold Exchange the center of world gold trading.  They have turned their back on the London Bullion Market Association…   

It is a fascinating play and it is set up for a huge technical rally…  At some point, you will want your gold and there is not going to be any around.

Technically, it is very bullish for gold.  Every time GLD is drawn down, it has set up a major rally in gold…

The disappearance of gold is a very bullish sign.  It means it is scarce and banks cannot get it elsewhere.

As I wrote last month, “…a subterranean river of precious metals continues to flow from the West to the East.  This is a future-shaping trend of significance inversely related to the attention it is receiving.  While it goes mostly unnoticed, tectonic pressures in the gold market are building nonetheless.  When the shakeup hits, it promises to be a Richter-scale financial event.”

Welcome to 2014.

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