Gold commentators on paper vs. physical, West vs. East, costs vs. revenue

by Greg Klein

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“There may come a day soon where the markets sell off if one of the whiskers in Big Ben’s beard is out of place,” wrote market strategist Andrew W. Sutton in Goldseek on June 20. “Or perhaps if his tie is a bit crooked. Or maybe we end up with Janet Yellen as the next puppet in charge over at the local banking cabal and we fret about her hairdo.” Certainly gold, silver, platinum and palladium plunged that day and the reason, once again, was commonly attributed to Bernanke’s musings.

Rather bland remarks at that. The Fed might ease quantitative easing later this year and might end QE by mid-2014. Yet that was enough to throw precious metals into a freefall. On June 21 former U.S. Treasury official Paul Craig Roberts told King World News that banks with inside info “cleaned up on this Fed statement. It’s entirely possible that’s what the Federal Reserve is doing is orchestrating events that make huge profits for the banks, and that this is the way it recapitalizes them.”

KWN recounted the sell-off with dramatic as-it-happened dispatches, like this one from trader Andrew Maguire: “Just off wholesaler calls. Most are too busy to talk at this time, but today [June 20] will be the largest volume day this year and possibly two years. Central bank purchases are almost certainly far in excess of paper sales. We are so close to the marginal cost of production that my contacts are saying the gates are wide open here to purchase all physical that is available….”

Maguire called the events an “irreversible global balance shift in physical gold.”

Other KWN commentary came from mining veteran Keith Barron, who said: “I’ve done some calling around to key contacts around the world regarding this gold and silver smash, and again it has to do entirely with the paper market, with options and with large entities utilizing derivatives.

“What’s being done here is criminal,” he stated. “But there won’t be any investigation by the SEC, CFTC or the powers that be because they are sanctioning it. King World News often talks about a ‘war going on in the gold and silver markets’ and people should remember that this is in fact a war. It’s a war to destroy the psychology of people invested in this sector, to destroy them mentally….”

Also using a combat analogy, Brien Lundin offered his interpretation. “Simply put, there is a war going on right now between the paper gold markets of the Western speculators and the physical gold buyers elsewhere in the world, but primarily in Asia.” In a June 19 Kitco piece the Gold Newsletter editor wrote, “While the speculators are playing their games in the futures and options markets, and generally driving the world price of gold much lower, the real investors and savers of the world are, thank you very much, buying as much gold as they can get at those bargain basement levels.”

Gold ETFs have attained powerful potential to rock the market. But, Lundin maintained, “using the ETFs as a proxy for global gold demand is a big mistake, and considerably misleading.” This year China, just one of the major Asian consumers, has bought over 604 tonnes, more than twice the amount lost by the two major ETFs, GLD and IAU. Along with central banks’ purchases, “the end result of the stunning short attack in the U.S. paper gold market has been a dramatic net increase in global gold demand.”

At the same time, lower gold prices inhibit miners and therefore supply. “So let the Western speculators play their games while they can,” Lundin concluded. “In every war, even the ultimate victors will lose a battle here and there.”

But Lawrence Williams asked, “Will the continuing flow of gold and silver from West to East continue unabated?” In his June 20 Mineweb post, he argued, “That is the question facing the gold markets. If the Chinese don’t come in as major purchasers then things could get worse for the gold investor before they get better.

“The other factor to watch is whether some of the major short positions in gold and silver on the COMEX now get unwound at the lower prices,” Williams pointed out. “If this happens gold and silver could both be set for a major upturn, regardless of China, as the big banks and hedge funds start to look for major profits on the upside.”

The previous day Williams noted that gold and silver prices are “currently being set by what is happening in the West—and in particular in the U.S., where there appears to be ever increasing evidence of gold price manipulation by major financial institutions, perhaps Fed-supported… But this price manipulation seems to be completely ignoring Eastern demand, and particularly that from China.”

While the two largest ETFs have fallen sharply, Brien Lundin points out that their gold losses this year come to less than half of Chinese physical purchases for the same period.

Officially, Indian purchases have fallen since the country raised its import duty on gold from 5% to 8%. But Williams suspects an underground movement is reviving gold-smuggling routes. And he emphasized that not just China and India but “virtually the whole of Southeast Asia is predisposed towards holding gold as long-term wealth protection.”

Williams also referred to economist Jeffrey Nichols, who on June 18 wrote that gold bears “have a fairly provincial view and a limited understanding of gold’s increasingly bullish long-term fundamentals. By ‘provincial’ I mean they are ignoring more than half the world—the half that loves gold and will accumulate more. They seem to think not much is important to the future of gold outside the United States and Europe.”

Writing in the Financial Post on June 20, Peter Koven addressed the impact on producers. “When bullion plunged 13% in two days back in April, miners evaluated contingency plans they would [adopt] if prices continued to weaken. Those included major production cuts, dividend cuts, layoffs and mine closures.”

Although gold remains high by historic standards, Koven stated rising costs place enormous pressure on some companies. But there is hope. “Numerous companies have reported that labour and equipment are easier to access today than they have been in years. Miners are also raising the cutoff grade on their deposits, which reduces costs while shrinking the mine life.”

He quoted Dynamic Funds portfolio manager Robert Cohen, who said both energy and chemical prices have also dropped. “Costs go up with the gold price and down with the gold price,” he told the FP.

Following a slight recovery on June 21, Kitco reported a survey of 19 reps from bullion dealers, investment banks, futures traders and technical-chart analysts who offered their prognostications for the following week: “Eleven see prices down, while four see prices up and four look for sideways consolidation.”

Whether pushing gold up, down or sideways, it seems any number of events might move—or maybe be used as an excuse to manipulate—the malleable metal. On June 21 Sharps Pixley director Austin Kiddle related the following week’s agenda: “Apart from watching the physical demand response, we will also watch Germany’s June IFO business climate index on 24 June, the June U.S. consumer confidence index and the May U.S. new home sales on 25 June as well as the June Germany unemployment change, the May CPI and the industrial production in Japan on 27 June.”

http://resourceclips.com/2013/06/21/the-yellow-peril/2/