Central Bank Intervention Strikes Gold Again

Investment Research Dynamics

I woke up this morning with a gut feeling that the precious metals market was about to be hammered on.  After all, we had 3 pretty good days in a row, something which must have horrified the Central Planners.   Gold was up over $1200 overnight until just after London a.m. “price fix.”  Have a look:

As you can see, from 10:30 a.m. (EST) to 10:45, 2.8 million ozs of gold were dumped onto the Comex.  This forced a rapid $20 price plunge.  There were no apparent news or event triggers.  Zerohedge attributes the hit to the possibility that the Big Banks got ahold of the FOMC minutes early or the latest results from the Swiss gold referendum were leaked.  I say bullshit to both.

The price of gold never rallied on the possibility that the Swiss referendum would pass.  I have maintained all along that it will not pass because, regardless of the actual popular vote, the U.S. will work with the Swiss authorities – who openly oppose the referendum – to make sure the vote fails.

Gold was smashed because the sector began to gather momentum over the past 3 trading days and that momentum had to be crushed.  The western paper gold manipulators are getting squeezed by the physical market right now, per the highly negative LBMA GOFO rate:

The GOFO rate is the cost for a gold/cash swap.  When it’s negative, it means that someone needs to borrow physical gold and will use cash to collateralize the loan.   A negative GOFO rate indicates extreme tightness in the physical gold bar market.  Not surprisingly, the LBMA has announced that it will stop publishing the GOFO rate in January.  Gee, I wonder why..

The GOFO – gold forward rate is -.24 for 1 month.  This is the most negative that it’s been since April 2000.   It’s negative out to 6 months right now, which is rare.  As you can see from the graph above, it rarely goes negative.  The huge spike into negative territory in 1999 was right around the time that Bank of England infamously announced that it was gong to unload 50% of its gold reserves, or 400 tonnes.   This was necessitated by a huge short squeeze in the physical gold bar market.

To put the 80 tonnes of paper gold dumped today into perspective, the latest gold warehouse report shows only 25 tonnes of physical gold classified as “registered,” or available to be delivered.  That’s if you trust the numbers and Ted Butler is the only analyst I know who does.  So more than 3 times the amount of available to deliver physical gold was unloaded in paper form on the Comex in the space of 15 minutes.

As of yesterday, there were still 570 tonnes of December paper gold open contracts (196,083 contracts).  If just 10% of these decided to stand for delivery, the Comex has a problem.  This especially true given the tight condition of the LBMA gold market right now.

So you can see the incentives in place for the Fed/Treasury to attack the gold market using paper.  India, China and Russia are currently removing more gold from the market than is produced every day.  The potential for massive short-squeeze is brewing.