Gold bullion prices have been subjected to a cleverly orchestrated bear raid in our opinion. Selling of paper Comex contracts on Friday, April 12th, and Monday, April 15th, totaled 1 million contracts, exceeding global annual gold production by 12%. The attack succeeded when the technical support in the low $1500’s/oz. easily gave way and led to waves of forced selling. The volume is without precedent and has all the characteristics of a panic liquidation driven by naked short selling….
There is no way to know where or when the liquidation will end, but it will inevitably do so, probably sooner rather than later.
According to our source at the World Gold Council, physical buying from India and China, which represents half of global gold consumption, remains robust. Central bank buying activity shows no signs of abating. The notion that weak peripheral European states will be forced to sell their gold holdings is fanciful. A more likely scenario is that these holdings would be used as collateral to support additional credit to the sovereign.
All in all, it appears to us that this gold sell off was made in America, based on an assessment of technical weakness by a large number of opportunistic players, and supported by dubious macroeconomic speculations. At the very least, a sharp rebound based on short covering and physical buying should be expected once the panic has run its course. The bigger consideration is whether the validity of the rationale for gold has changed.
It is quite possible that all of the known bullish arguments had been expressed when gold peaked above $1900/oz. in 2011. Negative real interest rates, financial repression, intractable fiscal issues, and central bank money printing were on the tip of a thousand tongues. Today, these concerns are widely dismissed or down played. The financial crisis of 2008 is a thing of the past. We are beyond it. The economy is on the mend, real interest rates will rise to levels competitive with gold, central bankers have the tools to exit money printing and will act with resolve to do so when the time comes, and government inefficiencies will someday be fixed.