I've gotten a few emails and I saw a few comments overnight, so I thought I should take some time to discuss again the ongoing relationships within our wholly computer-driven "markets".
To wit, the questions basically center around this:
"Turd, why the heck does gold move with the yen? This makes no sense. Fundamentally, a weaker yen (or any major fiat currency) should be positive for gold, not negative."
And my answer is:
This is the point. The question is fundamentally correct. The yen is a major, major global fiat. Only The Pig and the euro have a more prominent role in global finance. And the Bank of Japan recently announced that they are now going to be printing (devaluing) the yen to such an extent that they will be completely monetizing ALL ongoing Japanese government debt. An announcement like that should have driven gold much higher. Instead, as you know, it went much lower. Why?
Because, at present, the small handful of hedge funds that are trading gold derivatives have been programmed to sell gold with every downtick in the yen, likely because every downtick in the yen leads to a corresponding uptick in The POSX. So, a hedge fund computer "sees" a falling yen and it almost immediately responds by selling paper gold. There's no logic in this and certainly no assumptions regarding the fundamentals that are being made. Instead, this is simply a fully-electronic transaction, executed by high frequency trading computers.
Fools and goons, like those in the financial media or at the Perth Mint, would have you believe that this is "the gold market". That the "price" is set by about 60 actively trading hedge funds versus 6-8 Cartel banks and, to a certain degree, they are correct. So long as physical transactions continue to occur at/near the paper Comex price, then the electronic derivative market continues to have legitimacy.
Ahh...but what happens when it doesn't?
Somewhere between paper price $1155 and paper price $155, there will be an economic disconnect. Conceivably, the machines could mindlessly drive paper price to zero if the only factor taken into consideration when trading paper derivatives was changes to the value of the yen vs the dollar. But, at some point along the way, holders of physical metal will refuse to sell at the falsely-contrived paper price. This equals less supply. Also, at some point, miners of physical metal will refuse to operate their mines at the falsely-contrived paper price. This also means less supply. And if this occurs while demand continues or increases, the "market" will break.
Why? Because for a paper commodity derivative market to have any legitimacy at all, there must be physical deliveries made at the paper price. Again, why? Because if no physical deliveries are made at the paper price, then the price is pure fantasy.
Think of it this way. Let's say your local supermarket decides to offer strawberries at 25¢/pound even though there are no strawberries to be had on the wholesale market for anywhere less than $2/pound. Buyers soon show up and take delivery on all of the strawberries the supermarket had in inventory at the uneconomically low price. In order for the the market to then continue selling strawberries at 25¢/pound, they'll need to find a source of new berries willing to provide them at that price level. But holders of existing strawberries aren't selling below their real value and farmers aren't going to produce them at 25¢/pound and, so, the supply of strawberries...at that price...dries up. There is no "market" left. Oh sure, the supermarket can pretend that they still have strawberries on sale at 25¢/pound but if no one is actually buying them and taking them home at that price, then it's all just a fantasy regardless of the goons who are quick to declare a relentless bear market in strawberries.
So, what the hell am I writing about here? (And this is why I like the podcasts so much!) These "markets" are hopelessly broken at present. Physical price is being set by a small collection of hedge funds that are only selling paper derivatives based upon downward movements in the Japanese yen. This has no connection to economic fundamentals and this has no connection to physical supply and demand. Don't believe me? See for yourself:
Again, physical delivery must take place at the paper price or the paper price loses all legitimacy. Notice the blue ovals on the charts above. A disconnect has suddenly appeared in the yen/gold correlation. Is this the first sign that paper price has been driven down as low as it can go without breaking the paper---physical connection? Maybe.
The anecdotal evidence continues to come out of London where the supply of readily-leasable, 400-oz gold bars is apparently quite tight. GOFO rates plummeted again today and are back to the 15-year lows that we first saw last Thursday. Note the overall change from Oct 22 to today but pay particular attention to the dramatic change that began when the calendar flipped to November:
And so why is all of this important? Because:
- If the yen is going to be devalued to almost nothing
- And if the computers are going to continue linking the yen with gold
- And if physical supply continues to be found at lower and lower prices
- Then there is nothing stopping price from moving even lower
Charts, fundamentals, physical demand be damned. None of it matters if The Bullion Banks are able to continue delivering physical metal at the electronic derivative price. And that's the main question, because if the Banks don't have the metal to deliver here:
- Paper price MUST rise to the point where delivery stress subsides OR
- The long-awaited end of "futures wagging spot" is upon us
And, either way, this will be very exiting and good news WHEN it happens.
Lastly, before I head out, I just want to thank everyone for the kind notes and words of wisdom following yesterday's podcast. Again, the message I meant to convey is this:
Please try to help others when you can. Maybe even just a smile or a kind word. You never know what demons some other person might be struggling with and maybe, just maybe, a kind gesture from you could be the one thing that turns everything around. None of us exist on an island and all of our actions and interactions have consequences, some known but most unknown. To that end, try to be a force for good and endeavor to always make your impact a positive one. You weren't put here to simply serve and enrich yourself and, as the world seemingly grows darker with each passing day, it is imperative that we all keep this in mind.