Wednesday, April 17, 2013

Why Did Gold & Silver Fall?

It has been fascinating to watch how the precious metals decline has been viewed by different groups within the financial markets. The first group, which is the largest and makes up the mainstream media, feels that the gold "bubble" has finally popped and investors should now focus fully on purchasing the best financial assets money can buy: stocks and bonds.

Financial advisors do not make money if investors purchase gold. The average person would either call a bullion dealer to buy physical metal or purchase through a Sprott like fund. In either case, the advisor and the company they work for are not receiving their mutual fund management fees for this investment. 

The other part of this group is the mainstream media financial networks. If you have spent more than 30 minutes watching these channels you will notice their advertisements are composed mainly of the financial groups I just mentioned. The guests on their shows, which advise you to purchase stocks and sell gold, work for these companies above.

Think about sitting down with a real estate agent to have a discussion on what you should do with the remaining $300,000 of your retirement money. You are deciding whether to purchase a home, or put the money into stocks and bonds. Which direction do you think the real estate agent will nudge you? What if that same conversation took place with your investment advisor?

I left the real estate industry in mid 2007 because at that time I felt (after reading tomes of information) that real estate prices were going to fall very far for a very long time. It was my job at that time to convince people to purchase a home (which I relied on to put food on the table and a house over my head), and I felt in my heart doing so would hurt them. So I quit.

This same logic applies to gold and silver. I think that when this secular bull market in precious metals ends, it will culminate in a mania. At that point you will have many people brought on the mainstream financial news networks to give you their reasons why gold is going higher. Some of those people will be bullion dealers. The more precious metals people purchase, the more money they make on every commission. So would it make sense to listen to a bullion dealer when metals enter a mania? Of course not.

If someone makes their living selling a specific commodity (stocks, bonds, real estate, gold, cars, or boats), it makes no sense to take their advice on what you should buy. Will a sales rep at a Ford dealership give you a perfectly honest comparison of his Ford vs. the Honda across the street? Of course not.

The second camp in the gold and silver markets are the conspiracy bulls (some of which sell gold and silver as I just discussed). They believe that gold and silver rise based on fundamentals and they fall because of government manipulation. They believe that the Federal Reserve was the reason why gold and silver fell this week. 

The entities that took down the gold and silver paper markets on Friday and Monday care very little about what the government or the Federal Reserve want. There is no conspiracy. They are professionals. They are cold blooded killers, sharks in the water, that care nothing about the government. These entities have the ability to dump massive amounts of paper shorts onto the market, almost always in carefully calculated illiquid periods where they know they can make the price waterfall lower. Once it begins to fall it triggers "stops" that other professionals have it place. A stop is an automatic sell order that kicks in when a price reaches a certain level. 

Large trading groups can see these stops clustered around specific points on charts based on technical analysis. They dump the paper shares with essentially an unlimited amount of force, it triggers the stops, then the prices cascade lower. 

Please understand this is not some government forced action. They short markets to make a profit and they do it extremely well. You can look at charts and see this occur. You probably notice that I have never advised "trading" here on this site. For an average person to think he or she can compete with a high frequency trader means they either do not understand how the markets work, or they are a compulsive gambler. You have a FAR better chance of winning money at a casino in Vegas than trying to "trade" the market. Anyone who tells you otherwise most likely trades for a living and would like to sell you their services (sound familiar?).

These traders just made a calculated move against gold and they made a tremendous amount of money. In addition to triggering stops in the market, many of the weak hands have panicked and sent prices even lower. Margin calls kick in when prices waterfall lower and that creates forced liquidation. These sellers only add more profits to the professionals. 

What comes next is the continuing accumulation of physical metals from enormous players in the market that will take advantage of the discount. I'm not talking about a hedge funds, I'm talking about the elephants like China and Russia. These countries have a clear understanding of how this story will ultimately end, and they step in during these panic declines and purchases enormous levels of physical metal. If prices go lower they will purchase much, much more. 

Over the years I have laid out a very clear argument of how I believe the story will ultimately end. If you are a longer term reader you should hopefully understand that all currencies around the world are fiat, paper money. Their worth is derived only through confidence in that paper. Confidence has the ability to evaporate overnight. I believe that one night it will. If you can put the larger picture into context and take short term emotion away then gold at $1,900 vs. $850 has very little relevance.

If you believed that gold was going to be $3,000 in 2016, would you rather have it be $1,300 or $1,900 in 2013? You would of course rather have the price be $1,300 so you could accumulate more metal today to sell at $3,000 in the future.

I remember seeing endless headlines about Apple, the media's new financial darling, just a few months ago. After crossing 700 it has collapsed down to 426 as of this morning. Is anyone talking about Apple today? No, they are focused on blue chip stocks that will lead a portfolio to the promise land. Why? Because blue chip stocks are the hot investment, the flavor of the week.

For an understanding of where we are today and how this story will ultimately play out I recommend reading the complete 2013 Outlook.

8 comments:

  1. I have a rare bone to pick with your otherwise typically excellent analysis. You say:

    "The entities that took down the gold and silver paper markets on Friday and Monday care very little about what the government or the Federal Reserve want. There is no conspiracy. They are professionals. They are cold blooded killers, sharks in the water, that care nothing about the government."

    That strikes me as a rather naive, or perhaps better stated, simplistic assertion. The "professionals" (e.g. JPM) would have no possibility of orchestrating the recent, rarified PM smack-down were it not for tacit collusion with the Fed.

    Did someone from the Fed literally call the professional trading desks and coordinate the action? Almost certainly not. But the notion that this was simply an action taken by brilliant professional traders without any encouragement from, or interaction with the U.S. Government, strikes me as fanciful.

    The timing of this suggests strongly (to me and others) that it is a sign that the U.S. Government is becoming increasingly concerned about the status of the Dollar. It should be of concern, of course, given how the Fed continues to degrade it at breakneck speed (through QE), while China and Russia continue to sign bilateral agreements to trade outside of the Dollar.

    We do agree on the endgame, however, and I always appreciate your contributions as we witness the unfolding of an extraordinary period of economic history.

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    1. Let me try to explain my thoughts in a different way. I don't think that the Federal Reserve or the White House called a large investment bank on Friday morning and asked them to destroy the gold market with paper shorts. That could very well be what happened, but I do not believe that is what happened.

      However, I believe that moves such as this in the market, which have been documented in vast detail through the work of people like Ted Butler since the summer of 2008, are clearly illegal manipulation of the markets. The Federal Reserve and the SEC completely turn a blind eye to this action.

      It is like the cashier that works at a gas station leaving the cash register open and telling you that they are going to go outside for a cigarette. They will turn off the cameras and if you decide to take anything then they will have no problem with it.

      But they are not asking you to take anything.

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    2. And why don't you believe that?

      Is it because you think they have integrity and would not do that?

      Look at Jon Corzine - he blatantly broke the law - he should be in jail.

      But not only is there no trial - there is not even an investigation!!!

      It was a blatant criminal act.

      The whole system is ROTTEN TO THE CORE. Anyone who believes that 'they wouldn't do such a thing' is living in a world of total and utter delusion.

      In the real world they do such things - and far worse.

      There is no integrity - there is only greed and lawlessness... because the bankers know they are TBTJail.

      And remember who runs the Fed - NOT the govt!

      Repeat after me: The Fed is privately owned. Its shareholders are private banks

      Again: The Fed is privately owned. Its shareholders are private banks

      http://www.globalresearch.ca/who-owns-the-federal-reserve/10489


      Oh no..... these upright honest bankers would NEVER collude to crash the gold market...

      WAKE UP PEOPLE!!! You are being FLEECED by modern day Shylocks!

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  2. To Paul's comment: While I agree that there is almost certainly collusion between Wall Street and Washington, I would appreciate you providing an example as to how the Fed participated in this take down. If we had a clear, rational understanding of the method, we could bring it to the attention of our representatives. That doesn't mean they would do anything about it, but at least we would have the satisfaction of letting them know we are aware of what's going on.

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    1. See my explanation below.

      'take it to our representatives' hahahaha... are you living in the 1950's? Are you caught in a time warp?

      Hello...... this is 2013... where your representatives are allowed to insider trader - LEGALLY - where your representatives are OWNED by the people you want to report to them - because your representatives need millions to get elected and thus they have sold their votes to the banks and other corporations.

      Have you not noticed that bribery of YOUR representatives is LEGAL in America? So long as a lobbyist is the middle man a corporation can pass millions to YOUR representatives - and of course they do.

      Do you know how many lobbyists wall st has crawling over Washington on any given day?

      Time to wake up buddy - they are not YOUR representatives.... they are the representatives of Wall St and Big Business.

      They don't represent you - they don't care about you.

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  3. If this was not coordinated by the Fed I will eat shit.

    The Fed cannot allow PM to gain to gain traction so they need to send a message out to the retail masses and crush them.

    No big banks could do this on their own - and if they could why now - why didn't they do this when gold was around 1900?


    You need to read this analysis - ONLY THE FED could make this happen:

    http://blogs.telegraph.co.uk/finance/thomaspascoe/100024081/the-gold-price-crash-is-further-evidence-of-market-rigging/

    Now of course the big players are not ones to let an opportunity go to waste - of course Goldman etc... were shorting the market prior to the manipulation....

    But mark my words they are no fools - they see that the end game is imminent now. Cyprus sent a message out - Japan is on the precipice - US is sinking - China is slowing and in massive debt - and even Germany is in huge trouble (see the vehicle numbers plunging yesterday)

    So of course they know PM is the only safe harbour for what is coming so of course they are more than happy to jump in and pick up gold on the cheap.

    The Fed ADMITS to manipulating equities and bonds - so of course they manipulate gold.

    This is simply absolute evidence that they are involved in that market as well.

    But it is not working - it has exposed their desperation - and instead of fleeing gold there is a frenzy to buy PM.

    I can imagine the Fed is working closely with their Paper Gold Pushers to battle against the huge upsurge in demand and keep the price from skyrocketing

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    1. One of the better discussions this week on the metals take down from Ted Butler:

      http://silverdoctors.com/ted-butler-the-gold-silver-price-smash-who-what-how-and-why/

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    2. Thank you, Tuna, for offering Butler's rational explanation for the take down. We have to clearly understand a problem before we can address its solution...or at least insulate ourselves from it. Wide-eyed claims and hysteria are not going to produce desireable outcomes.

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