Posted August 10, 2021
By Byron King
The Gold Smackdown: What to Know and How to Benefit
Something odd happened on Sunday night. One of those things that makes you say, “Hmm…”
After a nice weekend, I was sitting at my desk straightening up paperwork, just getting my head in the game for the week ahead.
I opened my email, and right away was blasted with over a dozen notes from an array of precious metal companies. Urgent! Urgent! (And yes, considering what I write about, I’m on everybody’s email list.)
The gist was that gold and silver prices had just crashed and now these companies were offering great deals on coins and other bullion.
I like good deals as much as anyone, but I wanted to find out about this gold-silver price crash. And sure enough, on Sunday evening the precious metal markets tanked in Asia. In fact, at one point gold was down by $100!
Markets do what they do, but in another respect, and to use that old Russian line, “There are no accidents, comrades.” And for sure, a three-figure move in the gold price at market-open on Sunday night in Asia is no accident.
So what the heck happened? Let’s dig in…
Hang on; don’t panic. It was a flash crash with a quick, if partial, recovery. But definitely, it’s worth dissecting because, first, somebody is playing the system. And second, you can make some money if you do this right.
Begin with a chart of gold trading from last Friday to Monday.
Chart courtesy of Kitco.
Let’s go through this. The blue line in the upper left is Friday trading overseas, beginning in Hong Kong and London where gold (meaning gold contracts, not physical metal) traded in the $1,800 range per ounce.
Keep that contract/physical distinction in mind, too. The gold contract price is absolutely not what you’ll pay for physical metal with the markups over spot. Contracts are abstract; physical is real.
Then notice how on Friday, in New York trading, gold fell by about $40 to $1,760. The blue line traces down to the Friday close in the $1,760s.
By Friday evening, the media spin on the $40 decline was along the lines that gold fell because the U.S. Labor Department announced earlier in the day a bigger-than-expected improvement in jobs numbers.
The idea is that the U.S. economy (and hence the dollar) is recovering. The general rule is that when the dollar goes up, the gold price declines; and vice versa.
Hold that thought, and we’ll discuss job numbers in a moment. For now, go back to the chart.
There was no gold trading on Saturday, or on Sunday during much of the day. Then Sunday night gold opened for trading in Asia and the online New York Globex. The price promptly dropped into the $1,600s per ounce. You can see the move in that gold-colored line on the right side of the chart.
Whether it was selling in Asia or Globex online, the gold price tanked remarkably hard on Sunday night, taking silver prices down in the suction, it’s worth mentioning.
According to Zero Hedge, Sunday night’s action was “a sudden burst of selling in the gold futures contract” which “sent gold prices plunging to as low as $1,677.0 or almost $100 lower from the Friday close of $1,761.50.”
Again, from Zero Hedge, “The action definitely had the smell of a forced liquidation and no other securities really moved at the time (even the dollar was only up marginally).”
Remember your Sherlock Holmes here. As in the “dog that didn’t bark.” Gold crashed, but nothing else moved in any big way. There’s your “Hmm…” moment.
This downward move in gold was fast and unexpected. Typically, you only see large moves in price like that when some out-of-the-blue news hits the wires, like a major political upheaval, if not war.
But a basic, run-of-the-mine Labor Department jobs report? C’mon, man! It doesn’t work that way.
Zero Hedge highlighted one key element that’s indeed quite curious. Namely, over 24,000 “notional contracts” (that is, paper gold), worth over $4 billion, “were suddenly and furiously dumped in a completely price-indiscriminate manner whose apparent intention was to nuke the entire bid-stack.”
In other words, someone, somewhere, somehow pulled the sell-trigger. These perps coordinated a total carpet-bomb of the gold markets in a raw, naked, uncovered effort to unload a large array of contracts and drive the price down.
And just who would do such a thing?
Perhaps the dam buster in this raid was a deep-pocketed hedge fund intending to initiate a price smash-down and do what’s called “run the stops.”
That is, a sudden price drop triggers built-in stop-loss sells by a global array of players, which in turn drive the gold price even lower. It’s a disorderly cascade downwards, if not an avalanche. Then at the bottom, the hedge fund buys back in.
It’s clever if you can get away with it. But it’s hard to hide market sabotage like that for long. Eventually (and especially when you burn a lot of people), the folks on the losing side of the trade will reconstruct what happened.
Sooner or later, angry counterparties will figure out who unloaded up front. And the global paper market for gold includes many powerful people, entities like huge banks and governments with power to initiate criminal prosecutions. You don’t want to get these kinds of players mad at you.
Then again, the gold-dump could also be the policy brainchild of a Western central bank, of which the U.S. Fed or U.K. Bank of England come to mind, but there are others. Western banks are unfriendly to gold in general, and happy to see yellow metal tank while their fiat currencies strengthen.
And what about China? Would the Chinese initiate a gold price plunge and then buy back in at the bottom? It doesn’t seem like how they roll, but it’s still worth asking the question.
Right now, we don’t know who pushed the plunger on gold on Sunday night. The smoke has not cleared. The dust has not settled. And the gold price is definitely lower, with people buying physical metal hand over fist.
Meanwhile, the conventional wisdom is pretty thin gruel. It reflects conventional thinking and regime propaganda. In essence, we’re supposed to believe that markets are pleased with the “good” jobs report on Friday (see more on that, below).
Meanwhile, looking ahead the Fed may soon taper its easy monetary policies triggered by the coronavirus pandemic. Talk of tapering tends to strengthen the dollar and pull down the gold price.
Bloomberg News, for example, ran a plain vanilla story under the headline, “Flash Crash Shows Why It's Tough to Be Bullish on Gold Right Now.”
The kickoff paragraph stated, “Gold’s swift drop to the lowest since March has highlighted a tough truth for the precious metal — there’s a growing list of reasons to be gloomy.”
Of all the reasons Bloomberg listed to be gloomy, the idea that we live in a world of abysmally bad news coverage of macroeconomic issues was not one of them.
For the moment, however, and whomever/whatever prompted the gold price crash, buyers rallied and supported a modest recovery within a few hours. You can see it reflected in that dark line in the lower left quadrant of the chart above.
By Monday morning’s market open in New York, the price of gold had recovered back to the $1,740 range, trading on Monday down into the $1,720s.
And we’ll see where it goes from here.
Now, though, let’s return to that jobs report from last week, which gets credit for initiating the gold meltdown. Basically, the Bureau of Labor Statistics reported higher-than-expected job numbers.
Per Bloomberg, more rah-rah cheerleading: “Strong U.S. jobs data showed the world’s largest economy is well on its way to recovery. That sets the stage for the tapering of stimulus by the Federal Reserve, potentially removing one of the key drivers that helped send gold to a record last year.”
Oh really? Let’s look at a more granular breakdown of all those new jobs, in an economy that’s allegedly “well on its way to recovery.”
July 2021 jobs numbers, per US Dept of Labor, BLS.
Maybe it’s just me, but when I look at these numbers I don’t see a massive economic recovery. I just see a July report with numbers that aren’t too much different from June.
And look at the kinds of jobs being added to the U.S. economy. The biggest gain was in “leisure and hospitality,” which means bartenders, wait staff, cooks and hotel maids, etc.
Hey, there’s nothing wrong with honest work, but these kinds of jobs are service sector and pay low to modest wage scales. Plus, they have little relation to increasing the fundamental productivity of the economy.
More jobs in leisure and hospitality just means that the economy is slowly, painfully crawling out from under the big rock that the government dropped on it last year.
The Labor Department list has more “government” jobs too, which are funded by taxes, if not deficit spending. In other words, these kinds of jobs are a net drain on the macro-economy and not primarily productive.
Another large element of job gains was in “education,” reflecting call-backs as teachers return to school after many were furloughed in the past 18 months. That’s nice, but it’s not exactly the hallmark of a vibrant, growing, productive economy.
At the bottom of the chart are many new jobs in “retail trade,” which reflects many reopening stores. Thus we have more people at work, helping to sell all those foreign-made goods that routinely arrive at U.S. ports on foreign-owned container ship voyages originating overseas.
Here’s the key point: does this list of new jobs reflect a growing, strengthening economy that’s based on higher productivity? Does the list reflect more people creating more wealth?
Or does the chart of July jobs reflect more of a cosmetic rearrangement of the economy?
For the past 18 months, we’ve seen a Niagara of easy-money policy from the Fed, supporting one after another stimulus efforts from Congress. Looking ahead, we may wind up with another multi-trillion-dollar so-called “infrastructure” package as well, with all manner of social engineering embedded inside.
For all the federal money hemorrhaged into the system last year and in 2021, we haven’t seen much in the way of fundamental investment, not even with basic, critical things like roads, bridges, the national power system, etc.
For all the money spent by Congress recently, we have no new Tennessee Valley Authorities, no new Hoover or Grand Coulee Dams, no Manhattan Projects, no massive Navy shipbuilding programs.
All that federal largesse is more like fluffing up the pillows. It’s Congress handing out stimulus checks to unemployed and marginally employed people, while pumping up asset bubbles on Wall Street and in desirable real estate across the land.
This reflects an economy focused on deepening debt and the facade of solvency, versus truly improved productivity.
After all that, let’s bring it all around to how you can benefit.
Start simple. Buy gold. Buy silver.
Here, I’ll give a plug to the Hard Assets Alliance of which I’ve written before. Note that the parent company of St. Paul has a stake in HAA, but that also means that we’ve vetted it carefully to be sure that it’s above board.
And then, there’s a long list of superb mining companies currently selling at ridiculously low valuations. I’d be happy to name some names…
But Whiskey is not a portfolio newsletter, so we don’t make recommendations or track performances. I will discuss a few personal site visits in Whiskey articles to come, however… so you can take it for what it’s worth.
Right now, the price of gold and silver is at bargain levels, in my view. It’s time to load up on physical, as well as outstanding companies that mine the metals.
More to come, but that’s all for today.
On that note, I rest my case.
Thank you for subscribing and reading.
Managing Editor, Whiskey & Gunpowder