November Gold

Adam Hamilton    December 1, 2000    2408 Words


The gold market in November was definitely one of the oddest market events of recent memory. 


With gold’s perpetual roll as the ultimate store of wealth coupled with ebbing and flowing investment demand from all over the world in response to local discontinuities, the gold market is fantastically complex.  Gold is one of the few truly universal markets.  An ounce of gold purchased in the back alleys of Calcutta is exactly the same as an ounce of gold bought in a Beverly Hills boutique, and both purchases have an equal effect on total global gold demand.


With hundreds of millions or billions of people on the Earth interested in gold, and a sizeable subset of these folks buying or selling the yellow metal on a given day, one would expect that the price of gold would fluctuate a lot.  For instance, if a stock swoon in Istanbul caused locals to become more interested in buying gold, local gold demand would shoot up.  This local financial disturbance would have some small effect on total global gold demand, and prices would rise.  Since gold is the ultimate flight asset, it would make sense that its price would fluctuate substantially on a daily basis.  And usually it does.


Yet, defying all attempts at natural explanation, the price of gold was literally flatlined between October 26th and November 24th.  For an amazing 21 trading days in a row, gold traded within $1 of US$266 per ounce!  One dollar out of 266 is a trivial percentage.  It works out to four tenths of one percent (0.38%).  The gold chart during this strange time looked like one of the medical monitors on a paramedic drama after they have lost a patient.  It was as if gold was abducted by aliens and simply ceased to exist for 21 days in a row.


The peculiar nature of this tight trading range is perhaps best expressed in terms of other markets.  For the Dow at 10500 for instance, a 0.38% daily trading range would mean closes between 10460 and 10540 for over a month.  For the NASDAQ at 3000, a daily 0.38% trading range would mean closes between 2989 and 3011 … for over a month straight!  If the equity markets traded like this for 21 trading days, bubblevision would go bankrupt as equity investors keeled over and dropped dead of sheer boredom.  No one would want to follow daily closes within 0.38% of a central point, television ratings would plummet, advertisers would pull their ads, and the Wall Street cheerleading section would follow the dinosaurs into extinction.  If this type of unbelievable trading collar happened in the equity markets today, there would be a monstrous search as analysts tried to ferret out the problem.  It would be a media event.


This kind of price inaction in the gold market is just as implausible and downright miraculous as it would be in the equity markets.  In order to explore the anomaly, a fair question to ask might be the following.  “Well, if gold was so comatose for 21 consecutive trading days, was it because nothing was going on that could have influenced the gold price?”  Unfortunately for that hypothesis, there was a LOT that happened during those odd days where gold drifted listlessly like a ghost ship on a glassy sea.


On November 7th, the intrepid Bank of England completed the ninth in its series of highly publicized gold sales.  The bank offered up 25 metric tons of gold, or 804,000 ounces for sale.  In the past, these auctions, which are held every couple of months, generally precede some price action in gold.  If demand for gold is relatively high at the auction, traders and speculators bid up the price of gold following the auction.  If demand is low, gold may be sold off following a BoE sale.  Generally, the gold price dips going into the auction, as everyone knows it is coming and gold buyers hold off on gold purchases to ensure the BoE gets the lowest possible price for its fire sale of the Queen’s dusty gold hoard.


During this sortie, the BoE auction yielded a positive surprise in a bid to cover ratio of 3.3, indicating large gold buyers wanted to buy 2,655,000 ounces of gold at the price offered.  This should be quite bullish for gold, as it telegraphs to traders the fact that there are many buyers for gold at the offered auction price and they should bid up the market price of the yellow metal in an attempt to capitalize on growing gold demand.  So what did the gold price do on November 7?  Amazingly, it was basically unchanged.  Gold actually fell less than a dollar that day … an immaterial delta by any market’s standards.


Also on November 7th the twisted saga, that the US election has become, began.  Gold is the ultimate hedge against uncertainty and its price rises dramatically during periods of time when the future becomes murkier and less discernable than usual.  With the voting portion of the US populace split 50/50, and a brazen attempt to pirate a free election through the hiring and unleashing of a bunch of mercenary lawyers commencing, gold prices should have been full of exuberance.  To add to the now infamous and continually deteriorating US election mess, the investor darling NASDAQ lost 11% during the 21 days when gold was frozen in time.  During November proper, the NASDAQ hemorrhaged 23% of its value.  LOTS of uncertainty in the States, LOTS of wailing and gnashing of teeth from tech investors, and LOTS of selling of equities… yet, gold did absolutely nothing.


Other bullish news came out during gold’s month-long slumber.  Gold production in South Africa, the world’s largest producer, fell almost 4% from Q3 1999.  Quarterly gold output for the country languished near 46 year lows.  Physical gold demand in China, India, and Turkey was incredibly strong.  China and India together have 2.35b people, or 40% of the population of the entire planet.  If they are buying gold, demand is up and it is a very favorable omen!  Rumors emerged that the House of Sa’ud (Saudi Arabia and its ruling family) was buying gold but they have switched to the acquisition of 100 oz bars instead of the usual 1000 oz bars.  Apparently the larger 1000 oz bars have become more and more scarce.  The Australian dollar fell to a record low against the US dollar during this period, greatly exacerbating the widespread hedging problems in the Australian gold mining sector.  The lower the Aussie dollar falls, the higher the probability Australian dollar gold hedges will be called in by issuing banks and the higher the probability physical gold will have to be purchased to cover some of the drowning hedges.  On November 22nd the BBC announced that Russia’s state repository Gokhran was not buying diamonds in 2000 and 2001 but had decided to instead focus operations on purchasing and accumulating gold.  And these are only a few of the very positive gold announcements that emerged in November!


Hmmmm…  High uncertainty, dwindling physical gold supply, skyrocketing physical gold demand … one does not have to have a Ph.D. in economics to make a bet that the price of gold should have gone up uP UP during those 21 days.  Yet, gold twitched miserably in such a tight trading range that a scanning tunneling electron microscope was needed to see if it was still moving.


Amazingly, after hundreds of man-years of research and reams of evidence showing that gold has been openly manipulated since 1995, there are still folks out there who believe the whole manipulation hypothesis is false.  They claim that gold is trading like a free market.  They dismiss the theories of an anti-gold conspiracy as absurd.  They viciously attack the people presenting the evidence, yet are never willing to publicly debate that same evidence they dismiss.  These 21 anomalous gold trading days present a world-class challenge for the gold skeptics.  I have been searching and searching, but have yet to hear a plausible theory based on pure free-market supply and demand fundamentals that explains the price inaction of gold during this surreal period of time in November.


Intriguingly, there IS one precedent for this kind of gold market.  The last time gold acted this lethargic was when gold ownership in the United States was illegal in the early 1970s, and the US government officially pegged the price of gold.  A 0.38% trading range for 21 days in a row in a global free market is impossible without forceful and concerted efforts to make it so.  There ARE powerful artificial forces at play in the world gold market.


As we have known for a long time, something smells rotten in the commodities trading pits, and it is not the gold!


In late November, the yellow metal broke out of its tight range for a few days of more “normal” gold price action.  Yet, even then, watching gold during the trading day made it quite obvious that rampant fun and games were still being played.  Each time gold approached $270 on a spot basis, heavy selling was encountered to neuter the mini-rally.  A half hour later the metal would regroup to test $270 again, and once again strange selling would knock down the gold price.  $270 must now be a critical point of structural financial failure in some major gold short’s calculations, because that level has been aggressively defended for days in a row.  The same phenomenon was observed early last summer when $290 was the Maginot line in the sand for gold.


If there are any professional money managers reading this, and you want to have some good clean fun and make an absolute killing, put in some heavy buy orders for gold as it approaches $270.  The anti-gold folks will go ballistic, and fear will spread through their ranks like machine gun bullets ricocheting around a concrete room.  One of the gold shorts will crack under the pressure, and they will start buying.  Soon, all the gold shorts will believe control has been lost and they will rush to cover.  A relatively small amount of strategic physical gold buying at the right moment in time could be as catalytic as a single tiny blasting cap embedded in a mountain of dynamite.  The profits for the first trading house to launch a successful assault on the gold shorts will be simply enormous!


On the bright side, like countless efforts in history to artificially cap the price of gold, this one too will end in dismal failure.


Bill Fleckenstein, the legendary Silicon Investor Contrarian, recently began discussing gold in his awesome daily market commentary.  Mr. Fleckenstein has a huge following and has earned immense respect in the contrarian investor community.  His vast and deep understanding of markets coupled with his brilliant mind and entertaining prose have made him a tremendously revered investing leader.  He believes we should all be on the lookout for a coming change in the gold market.  He is keeping his ear to the tracks waiting for what he believes may mark a fantastic opportunity to participate in a new gold rally.


With even non-goldbugs flocking over to the gold banner like sharks stalking the swimming smorgasbord of a dying blue whale, the potential profit opportunities are becoming too large for the mainstream investor to ignore.  The gold shorts are injured and bleeding, and the smart money can smell blood in the market waters.  With general sentiment on gold fantastically bearish, the usual goldbug crowd and non-traditional gold investors alike are salivating at the legendary opportunity the gold market exudes at the present.


With the Philadelphia Gold and Silver Index up 7.3% in November while gold only managed a 2.5% gain, clearly some savvy money is betting that gold is set to rally soon.  More funds than usual are being pre-positioned in gold stocks, ready to ride high on the next gold wave.  Or maybe it will be THE gold tsunami…


From a fundamental standpoint, there is absolutely, positively ZERO doubt that gold is extraordinarily fundamentally undervalued.  Gold is dirt cheap compared to its own history, compared to crude oil, compared to general commodity prices, compared to the Swiss Franc, compared to equities … and the list goes on and on.  In addition to stellar fundamentals, the supply and demand picture for gold could not be more bullish.  Global fresh mined gold supplied to the market each year is far less than the gold demanded annually by an insatiable and growing market.


So far, the anti-gold forces arrayed against the metal have been able to scrounge up enough tons for sale to meet the rising tide of gold demand.  Sooner or later (my bet is sooner), a day will arrive in the gold market like non other.  On that fateful day, the handful of large money-center bullion banks acting as surrogates for their government puppetmasters waging the gold war will reach into their pockets and come up empty.  They will frantically hammer the phone lines and search their cavernous dungeons, yet will be unable to find anyone else willing to sell or lease their hard-earned gold at 25 year real lows.  That day, the artificially augmented physical gold supply from central bank gold sales will dwindle, the much smaller mined supply will be dwarfed by physical demand, and the gold price will leap joyously towards the heavens. 


After a long hard march through the parched desert of the gold world, it is very exciting to see what appears to be a shimmering oasis on the horizon.  While we are still many miles away from the oasis, it is exciting to begin to see a faint light at the end of our long tunnel.  At the moment, it is impossible to know if this gleaming oasis is really the long awaited real gold rally, or if it is simply another ethereal mirage playing out in our weary minds.  In the next few weeks, as we cross a few more sand dunes, the near future picture for gold should become much more clear as we approach the oasis…


Keep the faith fellow goldbugs!  The war between free-market forces and command and control totalitarianism rages all around us.  We have the invincible warriors of fundamentals and history on our side, and soon we will count money fleeing the NASDAQ carnage as our new ally.  Truth, justice, free markets, and gold will prevail!


Adam Hamilton, CPA     December 1, 2000