Gold Price Attack First US Response in Currency War Escalation

As increasing evidence points to a single-source origin for what subsequently became an avalanche of strictly paper, or futures contract-associated gold sales, motives and suspects for the assault are starting to become apparent. The failure of the orchestrated rout in the Futures market to catalyze a parallel effect in the physical market, furthermore, underscores the strength of demand for physical gold versus paper gold as end-users and investors stampede into gold coins to take advantage of the low prices precipitated by the attack.

Considering the very public and multi-faceted pressure that the U.S. directed towards Japan after Bank of Japan governor Haruhiko Kuroda announced the planned $1.4 trillion capital injection, it is safe to say that American economists are extremely unnerved by Japan’s unilateral move, which has already caused Japanese exports to rise thanks to a weakened yen. A theory that the weaker yen would drive money market investors to other currencies has not really panned out, and so fears that those investors may move to monetary metals is one motive for attempting to undermine the safe haven status of precious metals.

Since 2008, $4.7 trillion has been added to the world money supply by the Fed, the European Central Bank, and the Bank of Japan. The failure of of this historically unprecedented coordinated cash fabrication exercise to move the needle even slightly in a positive direction in any of those economies suggests that the effectiveness of quantitative easing has been grossly overrated. This in turn is fuelling an increase in demand for physical gold as an investment, as investors perceive increased risk to currency purchasing power with every escalation of capital fabrication.

Russia, Korea and Britain are all moving to amp up their own stimulus programs, further exacerbating the bloated world money supply.

Gold Demand ‘Extraordinary’

Demand for physical gold is described as “extraordinary” following the end of the raid on gold with prices for bullion currently at $1,426.05 per ounce early Friday morning. Bloomberg reports

‘The premium for metal on the Shanghai Gold Exchange is as much as $10 an ounce, in Turkey it’s almost $20 and in Asia it’s about $5,’ Bernard Sin, head of currency and metal trading at bullion refiner MKS (Switzerland) SA in Geneva, said by e-mail. ‘Last week, it was about $1 in Asia and Dubai,’ he said.
‘Physical demand is extraordinary,’ Sin said today.”

And the Wall Street Journal reports:

Gold prices continued their rebound off 26-month lows set April 15, as the lower prices lured some investors to return to the market as buyers. While the recovery in futures prices has been modest, traders and analysts said that purchases of physical gold are leaving some vendors without inventory while others delay delivery as they rush to restock.

“Reports of record demand for investment bars and coins keep coming in from around the globe with retailers in North America, Europe and Asia-Pacific all out or running out of stock as buying interest overwhelms supply,” traders at TD Securities said in a note to clients.

The U.S. Mint has sold 153,000 troy ounces of gold coins so far in April, up more than three-fold from the 50,000 troy ounces the Mint had sold as of last Friday.

Motivated to Manipulate

Central banks are terrified that a strongly responsive gold price correlation to capital fabrication levels could trigger a destabilization of confidence in their fiat currencies, which are essentially governments’ promises to pay. So it comes as no surprise that central bankers are exerting every effort to inform regulatory policy in futures markets to accommodate unlimited issuance of futures contracts in tandem with relaxed transparency and reporting requirements – a situation glaringly present in the U.S. futures market after an American court quashed a rule to limit position sizes by speculative participants in October 2012.

It is conceivable that launch of the attack on the gold price last week had its origins in informal discussion and collusion among the Fed, the U.S. Treasury Department and the Commodity Futures Trading Commission along with the major banks involved in the attack. (AMSCAM, or American Syndicate of Collusion and Manipulation)

But importantly for gold investors, it must be noted that this is likely not the last attack by AMSCAM. A recent article by Mark Hulbert at MarketWatch and citing research by Claude Erb and Campbell Harvey, a “fair value” of $800 per ounce, derived by calculating ‘a ratio of gold to inflation going back as far as they were able to obtain data. They report that this ratio, when expressed in terms of the U.S. Consumer Price Index, has averaged about 3.2-to-1. Even at $1,400 an ounce, this ratio stands at 6.03-to-1, or nearly double this average.

That message was picked up and amplified across the mainstream press, and just as Goldman Sachs’ proclamation to “Short Gold!” just days before the futures market rout began, so should all such sudden unified anti-gold media reports be regarded as potential harbingers of more attacks to come.

Either way, there will likely be an intensification of effort to destroy the perception of gold as a safe haven, especially if US debt auctions perform weakly.

MarketWatch reports:

‘Treasury Inflation-Protected Securities, which increase in value alongside inflation, stabilized Friday after selling off en masse following a weak auction of 5-year notes Thursday. TIPS are designed to hedge against inflation but modest expectations for inflation growth forced yields to spike. The $18 billion auction of 5-year notes sold at a yield of -1.311%, 8 basis points higher than the market at large. After the auction, 5-year yields continued to climb another 6 basis points -1.252%, according to RBS data.’

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James West is publishing his book “The Real Economist: A Treatise and Revision of Economics as a Science” in 2014. Sign up for the Midas Letter Free Edition and you could win a free copy.

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