Speculators in gold price futures are short 670 tonnes – the biggest bearish position in 25 years.
First things first: I want to thank the many readers who have expressed their interest in an article about my views and theories on gold and silver. In fact, the response has been so strong that I decided to cover precious metals (PMs) more broadly on WOLF STREET, but only in an unbiased and analytical way, if that is even possible.
“Gold” is subject to so much debate – and this debate is influenced by hefty agendas on all sides – that coverage attempting to stay out of this debate is going to require some stepping on toes.
We will attempt to focus on the physical metals and their derivatives (i.e., “paper gold”). But we will stay out of the debate as to whether “only gold is money,” whether the dollar, or any currency, should be backed by gold, and the like.
Yes, gold and silver markets are manipulated, up and down, but just about all markets are manipulated, and in terms of the most manipulated markets of all, gold and silver probably don’t even rank near the top. That honor would likely go to cryptos.
And in terms of magnitude, the top contenders for the most manipulated markets of all are the credit markets, including the government bond market, and the corporate bond market. Central banks manipulate credit markets explicitly and not in secret with the full power of their monetary-policy tools, such as “forward guidance,” interest rates, and QE. No other market has manipulators lined up that openly and publicly use trillions of dollars, euros, and yuan, and quadrillions of yen, to accomplish their goals – and are being hailed for it.
Our coverage of PMs will be neither perma-bullish nor perma-bearish, and neither gold bugs nor gold haters will be happy.
Today, we will kick this off with some insights into the short positions in the gold derivatives market, and what this might mean for the price of gold near-term.
Gold has had a rough time so far this year, down about 9.8% year-to-date. But today, gold jumped 1.5%, from a 20-month low, to $1,212.20 at the moment – instant reaction to Fed Chairman Jerome Powell’s speech this morning, or just a relief rally, or result of the record short-positions that have been built up?
From Mining.com via our contributor Safehaven.com:
Rate hikes, low inflation, the strong dollar and buoyant stocks have sapped investor appetite for gold.
Gold is trading at its lowest relative to S&P 500 Index futures since the start of the global financial crisis in 2007/2008 and the trickle of outflows from gold-backed ETFs have turned into a torrent.
Nowhere is the negative sentiment more evident than on derivatives markets where investors and speculators seemed to have lost all confidence in gold’s ability to move higher.
According to the CFTC’s weekly Commitment of Traders data up to August 14, investors (non-commercial traders) are now short 215,467 lots, the equivalent of 670 metric tonnes.
In a research note ANZ, a bank, points out that the short position (bets that gold will be cheaper in future) is the highest since data was first collected by the CFTC in 1993.
It’s also the first time since 2001 that investors have entered a net short position (gross shorts exceeding gross longs).
ANZ analysts Daniel Hynes and Soni Kumari say in the past, “such extreme levels of short positions have led to a rally in prices”:
1999, short positions rose five-fold to hit a then record level of 80,000 contracts. Not long after, gold prices rallied 16% from USD250/oz to USD290/oz over the course of two months.
Short positions spiked again in July 2005 and January 2016, with gold prices rallying 12 percent and 14 percent respectively over the subsequent three months. In both these cases, the net long position was extremely close to being negative.
This raises the specter of investors closing out their record level of short positions, and thus starting a short covering rally.
The CFTC started breaking out the data by type of investor in 2006 and the net position of so-called money managers – mostly hedge funds and other large scale speculators – is also at a bearish record of more than 200 tonnes.
As the author in the above quoted segment from Safehaven.com indicated, massive short positions by speculators — not producers that are hedging their production — can put a temporary floor under the price of an asset and provide upside fuel. This is because shorts have to buy to cover (close out) their positions.
- When prices are falling, they buy to take profits.
- And they buy when they’re scared of getting their faces ripped off when prices are rising (“short-squeeze”).
We also see this effect in the shares of Tesla and in the Treasury 10-year yield, both among the most obvious short-candidates with record short positions already established against them.
Shorting is very risky, with an out-of-whack risk-reward relationship. So shorts are a nervous bunch — and they’re furious buyers during a short squeeze (prices rise), thus pushing prices up further. And their profit-taking can stop a crash.
Very large short positions that have already been established put a floor under the asset price and provide temporary firepower on the upside – the emphasis being on “temporary.” So for traders focused on the near-term, it’s probably not a good idea to get too bearish when there is already so much bearish sentiment out there.
I have a new measurement tool of the Fed’s policy direction. It spiked 150% from year ago. Caveats apply. Grain of salt helpful. Read… Introducing My New Fed-Hawkishness-O-Meter
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Nice topic for today and for the future.
While I don’t care much about gold, I do greatly appreciate how it inspires both economics and emotions. Given it’s on the ‘outs’ for now as a hot item, it could serve as a microcosm of economic thinking in a lot of ways. So many people confuse finance with factoids that this could serve as a tool for education without people actually realizing they are getting educated, which, I have observed, most people hate.
So if one wanted to bet a bit of gamblin’ money on a price rise – either due to a short squeeze or global events, or the latter triggering the former – in the coming (say) 3-6 months, should one prefer GLD or SLV calls (the latter might be preferred by way of a volatility play) or simply an ETF based on the spot price?
I’ve been into gold since the start of QE, and like anything with investing there’s a learning curve to find what moves the needle and what doesn’t.
In my view, current moves have everything to do with a strengthening dollar.
The places where physical gold trade the most tend to be EM’s in the east – China, India, Indonesia, Russia, etc.
Weakening dollar means more investment flow to these EM’s and they have more money for things like Gold. Strongengthening dollar pulls investment money from EM’s and the opposite happens.
I hate to say it, but in many ways we’re betting on future central bank policy here, particularly of the Fed.
I tend to think the that the Fed will continue to slowly tighten over the next year or two until the financial markets correct downward. Then they’ll ease again, push the dollar lower and gold will finally stop it’s decline and head higher. My own gut feeling is the down trend won’t be too bad (I doubt it’ll touch $1000) while the next leg up could test the old highs but it might take 5 years to get there.
From my experience so far, gold is not as volatile as stocks or cryptos, so unless you’re levered it’s not that frightening to wait out a down trend.
Wolff – I’m glad you’re interested in a balanced view here because the hype with precious metals is very different from the market. There’s a lot of big conspiracy talk, economic apocalypse talk, barbarous relic talk, and so on that doesn’t help to explain the core trends.
A very sensible analysis, thank you, and in accordance with my thinking also. I have always supported a 10% portfolio in gold bullion (the real stuff), under the bed as a hedge against the bad things the Fed is or will be doing to depreciate the dollar ad infinitum.
History does not lie and I see no reason to believe that the dollar will prevail as a reserve currecy forever, but perhaps for the time being at least. We will have a basket of currencies for international trade eventually, IMHO but whether that is in my lifetime can only be surmised. In the meantime, stick to gold for at least 10% – the are no costs to holding the metal at home.
Except if someone discovers that you have gold hidden there and runs off with it. That’s 100% cost.
Rusty, that’s only so if you fail to insure it. The same is true e.g. if you have some valuable paintings hanging on your walls. I pay a flat annual insurance rate for an unlimited amount of stored precious metals. The cost of insurance is essentially insignificant.
WHEN fiat goes away…then gold will prevail…the price is irrelevent
I think it’s important to think of the way we live our lives in terms of “probabilities”. What’s the probability that you’ll be buying groceries or electric toothbrush replacements at Costco with gold? When’s the last time that Americans used gold to buy food? What’s the probability that gold shavings will buy you a Big Mac? People (including visitors) in Zimbabwe use other currencies and credit cards (like VISA), not gold.
Re: When’s the last time that Americans used gold to buy food?
Not too long ago, actually. Until 1971 the USD was backed by gold when Nixon, trying to renege on Bretton Woods to pay for the Vietnam fiasco with counterfeit money, took the dollar off gold and the newsmedia called it “closing the gold window” as if this blatantly dishonest act was an accomplishment.
Since then the purchasing power of the USD has lost 95% and counting while gold’s nominal price has jumped from $80 to $1,200/oz. To put it in perspective, back in 1971 with gold at $80/oz and gasoline at $0.25/gallon, you could buy 320 gallons of gasoline with 1 oz of gold. Today with gold at $1,200/oz and gasoline at $3.50/gal, you can still buy roughly the same amount of gas. The same cannot be said about the fiat dollar which has ruined its savers.
Did you happen to notice that gold went up 30% annually over the 70s?
When id the last time you bought a Big Mac with FB or TSLA stock, or a Junk Bond?
Do people snub their noses at Bitcoin profits because they can’t buy stuff at Target with it yet?
It is comments like yours that make me LOVE LOVE LOVE the contrarian aspect of gold.
Prior to the rise of gold ETFs and the financialization of the markets in the 2000’s only central banks and commercial hedgers largely moved the market.
I’m beginning to believe that a major reason gold has been rallying since 2000 is the advent of China and its massive commodity hunger. As China is trying to detach from the dollar, I suspect they play a major role for the reason gold has rallied from about $280/ ounce in 2000. If a single major player is accounting for 25%? 50%? of the gold price then I don’t see any real positives for gold price in the near future. China appears to be weakening and will likely lose the trade war.
Having an abundance of cheap money also seems to have helped the price of gold rise, so if Fed tightening continues, some of the long gold trades may unwind.
If the US fiscal situation was the reason gold has rallied then the Trump tax cut should have sent gold seriously higher. I don’t think US fiscal imbalances have anything to do with the price of gold beyond their miniscule effects on the dollar.
So the combo of a single major buyer (China 25% of price?) and Cheap money (25% of price?) could mean 50% downside with a conservative drop of 20% easily in the cards. Just a guess, but gold is just a shiny metal after all.
At a time when stocks, RE, bonds, paintings, custom cars, etc. have skyrocketed, gold looks relatively attractive, even it has a 20% downside. The downside in the other assets is potentially a lot higher.
Gold is the only asset class that hasn’t skyrocketed. This may mean a spike up in the future.
I wouldn’t rule out some gold in your portfolio.
I agree. Buy the most hated investment, then wait for it to be loved, then sell. I remember a Jim Rogers interview about 5 years ago where he said he was investing in the dollar since it was weak and hated. I thought that’s nuts, but he was right. If gold continues its decline, and shorts become more aggressive, Jim will be buying gold, but only at a time and level where most people would regard him as nuts, like I did. There are still too many commercials on TV touting gold, but when the price drops another 10%, and the commercials disappear, that will be your entry point….not for physical, but mining stocks which pay a dividend, and price increases in gold are magnified by an even higher jump in the stock price. That way you can avoid the “how do you buy a loaf of bread with a gold coin conundrum”. Sell a few shares of GDX, and buy all the bread you want. I read somewhere that some mining companies will pay their dividends in physical if you request it. Has anybody heard of this?
Yes, there is one company that does this.
The company is called Resolute Mining and based out of Australia.
Here is the story from 2016:
The relationship between China and gold is much complicated, but one details need to be noted: since 2007 China has been the major gold producer worldwide. Part of this is due to the collapse in South African production which started in the 70’s and got a whole lot worse in the 90’s, but the astonishing growth curve between 2007 and 2017 (from 276t to 440t, a nearly perfect 6% increase per year over a decade) hints that, apart from the usual account embellishments bureaucrats in Beijing excel at, China has been mining gold like there is no tomorrow.
The China National Gold Group (CNGC), obviously State-owned, has been both developing mines and buying them outright from joint ventures between domestic investors and foreign gold mining companies. Even more so than over State-owned firms of China, it’s a large, shady conglomerate which engages in a wide variety of activity.
Besides gold mining and refining, they also mine and trade a variety of industrial metals, from molybdenum to copper. That’s easy to understand. Somewhat harder to understand are their forays into cosmetics (titanium oxide is a core component, albeit CNGC doesn’t claim to produce any) and their ventures in medical services and food companies are incomprehensible. But, again, this is a State-owned conglomerate in XXI century China.
I think not enough room has been given to CNGC as a global driver of gold prices, with “analysts” concentrating on relatively small projects in Canada or the US which are dwarved by what CNGC has been doing both at home and abroad, especially in Uzbekistan and Ghana.
Personally I believe the gold market is manipulated, but not by some sinister banking conspiracy against “sound money”.
The conspirators are the mining companies themselves and the people who allow themselves to uncritically accept their paid for advertisements as investment advice.
For the record I like precious metals: I like to take out my Mexican pesos from time to time and hold them in my hands while calling them “the precious”. I also daily use an old money clip with a Spanish silver dollar embedded on it.
But the propaganda I’ve heard from precious metal bulls over the past decade is on level with Musk’s cult of personality.
You imagine that the value of physical gold will drop significantly below mining costs?
Good luck with that.
The “just a shiny metal” has retained its value over thousands of years, in stark contrast to every fiat currency. Furthermore, the argument that gold is in danger of dropping precipitously in value at a time when paper assets are widely inflated to (or above) historical highs, and Governments are burdened with absurdly high debt burdens that will obviously never be repaid, is simply not credible.
Copper and silver are presumably well below their cost of production.(varies from mine to mine) I’ve heard average break even for a copper mine is over $3.25/ pound, and about $15-$16 silver. It depends on the grade (higher grade easier to extract) and other factors (labor laws, etc), type of mine.
It’s amazing anyone even bothers to mine given the difficulties.
According to Codelco (Chile’s State-owned copper mining company), their average copper costs in Q1 2018 were US $1.35/lb, which is well below their 2014 costs (US $1.5/lb).
Prices over the same timeframe have remained stable: copper was US $3.11/lb in Q4 2014 and was US $3.15/lb in Q1 2018.
However average grade has been dropping like a stone: after peaking in 2015 at 0.85 it now stands at 0.68: Codelco copper production peaked in 2015 and the company has really been struggling to keep that level of production.
Make of this what you want, personally I am not touching mining stocks for the time being, at least until the situation in China starts to clear.
Very true. Referring to gold at $250 in 1995 and 2000 that it is a big rise since then, one could say the same for other assets, even oil at $10 in the 90’s. Niether will be going back to those levels any time soon.
Tinky, respectfully, Metal costs drop below mining costs all of the time. There are many miners that have to shutter more expensive mines when this happens for a period of time. Eventually, of course, an equilibrium is found but commodities are a tricky business.
Gold being Shorted must be Sold to bring down the Price. Gold for sale would be bought by Russia, China or India. To `Realise` the Short, the Gold must be bought back at a Lower Price; even if Trump gets a Cactus Enema from Netanyahu.
The only reason to buy gold is if you’re terrified of a global economic collapse. Other than that it’s a really lousy “investment,” totally unstable and unpredictable.
The only upside, at least compared to stocks and bonds, is that it at least will always be worth something no matter how much it’s momentary value gyrates.
Right. And after the Battle of Stalingrad, which is as close as it gets to a global economic collapse, a winter coat was worth it’s weight in gold. That’s why the gold bugs are hanging on to their gold.
Maximus and Mike,
It’s also possible to envisage outcomes somewhere between Business as Usual and Mad Max, where law and order is maintained to a fair degree as we struggle through really hard times.
There are also many reasons why people and institutions buy gold, or anything else for that matter. We don’t all think the same, and we don’t all have the same objectives with all our dispositions.
I’ll admit I’m personally very concerned about the future, as we appear to be heading for disaster by way of multiple converging threats (ecology, climate, finance and energy/resource), and we concentrate large effects into a short time period as we move our leverage, consumption and other impacts up the near vertical segment of the exponential curve. Depending on how things evolve, I’m not sure if gold will prove really useful, either, but since I can’t see the future, it’s better to have one option more than one option fewer, I reckon.
Essentially, I myself don’t buy it for investment reasons, I buy it for insurance reasons. I set aside a percentage of my income which I use to accumulate gold, and I hope I will never have any use for it.
Exactly. I’t’s bought for non-investment purposes only, as an emergency backup in case of near total disaster. If it were me, though, I’d also be buying silver as it’s difficult to buy small items with an expensive gold coin.
I have a bit of silver too, but as I see it the trouble with silver is that it is too much of a commodity. Gold is more purely monetary in nature, with some ornamental value and only a very small commodity aspect to it. Silver is also very bulky compared to gold for amounts of each representing an equivalent purchasing power.
Good analogy with the “Stalingrad winter coats”…..My view from one who does not own any gold/stocks would be to own the smallest increments of gold…ie…jewelry, smallest denomination gold coins (of any currency if there still is any), but not “bars” of gold or even gold stocks…….or mining paper…..if “total collapse” mining stocks/market stocks in gold” could become worthless…..but small amounts of gold will get the individual/family food etc….by bartering the small amounts that which can be “seen” physically by the sellers of needed goods.
(From an individual who grew up during the Great Depression and still has memories of the hard life my parents and relatives had then)
Thx for going into this subject.
So Mike You think paper products that theoretically have ZERO value are better “investments” do you Well all I can say is you are in for a rude awakening
For survival purposes the paper product I’d be investing in is toilet paper, a product we’ve all grown so accustomed to have that it has the potential to be in great demand after civilization collapses. Try going without it for a week if you don’t believe me. :)
the trick is to crumple and then un-crumple newspaper (or any paper) a whole bunch of times. it starts to make it soft. like when you find a really old dollar bill, it has that super soft feeling? this will all be common knowledge one day.
(people who talk about putting your finger through a hole in the paper are just teasing or lack prolonged experienced in these matters IMHO)
Without context, your comment is nonsense.
Using gold values vs. the S&P 500, for example, and starting when Nixon closed the window in 1971, gold outperformed the market, and significantly for a period of time, for 24 years. Twenty-four years!
For the next ~11 years, the market significantly outperformed gold.
Then,for a few years after the 2008 crisis, gold wildly outperformed the market.
Lacking a time machine at the present time it’s an unpredictable investment. Can it go up in value a lot in the near future? Maybe if inflation explodes or the local economy collapses for some reason.
But if you’re worried about it getting that bad wouldn’t you be better off spending money on a (well armed) self-sufficient place in the country with lots of food storage?
If the country really does get that bad then food will become more valuable than gold.
Great minds think alike! I only like “predictable” investments, too.
Unfortunately, after decades of looking, I still haven’t found a single one.
Ah, well, now we are getting to the crux of the matter. In my view there is no way to avoid another major economic crisis in the relatively near future.
People like Wolf have forgotten more about economics, especially in terms of theory, than I’ll ever know. But I have been paying close attention since the Tech bubble, have learned quite a bit, and feel comfortable asserting that there is zero chance that a massive debt crisis (call it “liquidity” if you prefer) can ever be resolved by piling on mountains of fresh debt.
The coordinated Central Bank actions did work to delay the inevitable crisis, and for longer than I had expected. But it resolved nothing, turbo-charged wealth inequality, and made the markets even more dangerous by encouraging malinvestment through the use of suppressed interest rates, as well as direct support.
I have no doubt whatsoever that there is another major crisis on the horizon, and there have already been a number of tremors that are, in a sense, natural precursors to the main event.
So, within that context, I believe that gold will prove to be an exceptionally good store of value in the coming years, as it already has been in Venezuela, Argentina, and Russia, etc.
With regard to your other points, I do agree that a safe home, productive business, ability to grow food, etc., will become increasingly important. But I disagree with your black and white views on gold’ utility during a crisis. I expect that there will be plenty of opportunities, both as the crisis unfolds, and after the flashpoint, to turn gold and silver) into other valuable goods and services.
The Central Banks have been proven to be able to pull the economy out of a disastrous situation since 2009 and you are saying they can NOT “prevent” a disaster “in the near future?” This zombi actual economy with low or no growth has been proven to be sustainable together with asset inflation with low real world price jump. As long as the Central Banks can
1. Controls the currency so that $ today can still by roughly same amount of everyday stuff tomorrow
2. There is one $ demominated asset that rises/yield in $ price, be it treasury, houses, all kinds of bonds and stocks
people will ignore gold.
You will see gold shine when either of above the two conditions are broken, but they may stay good for quite a while. Do NOT underestimate Central Banks and the military/police force behind it.
you are correct …BUT….ALL of your gains are in USD fiat,,,, with the backing of 200 TRILLION dollars in DEBT….GOLD has no liabilities…none
Try to buy a loaf of bread with a gold coin and see what change you get back.
If you’re really worrying having to use actual specie for currency then silver is far more practical.
“As a result of JPMorgan’s outsized influence, the price of silver has remained artificially depressed in price, while the bank has used the depressed price to not only amass billions of dollars in paper trading profits, but it has also accumulated 750 million ounces of physical silver on the cheap, along with 20 million ounces of physical gold.””
I calculated the above position to be “Starting Over Money” or about $35 billion.
I’m sure if JP Morgan does have the above position they believe there’s a Global Economic collapse coming. They haven’t taken 7 years to acquire the above position for a $2 upward move in the price of silver or $200 move in the price of gold. The believe that they know the system is going to unwind and have prepared them selves for such a move. IMO.
While having some PM’s as a SHTF hedge seems like a good idea, there are some important considerations to keep in mind with both “Paper Gold” and Bullion.
I’m old and can recall a couple of times when holders of “Paper Gold” decided to redeem it for bullion, en masse.
And there was a problem with some of the issuers not having enough physical Gold on hand. to cover the redemptions.
Due diligence in selecting who to deal with is important.
People are not rational about Gold.
If you use Bullion for a major purchase you are going to get attention.
Some of it from people you really don’t want to meet.
I think having an allocation of PM’s (Physical PM’s) is a good idea if you are prudent and discreet.
I’m a lot more wary of “Certificates” based on past performance.
Pre 1964 silver coins are not a bad choice for your silver holdings, they don’t make people’s ears perk up.
Gold will always excite people, but Krugerrands and the like are a little less exciting than gold bars.
The problem is this might not be necessarily a contrarian position. Mish has an article pointing out that the current chart setup seems to resemble the situation from many years ago when Gold started its march from 200 dollar plus to a thousand plus. If a couple of people are noticing that, is that a contrarian position?
Hard to tell.
“Hard to tell.”
Easy to tell.
Rule 1 of successful investing: Never take investment advice from someone who sells the investment they want you to be interested in.
I like gold for the long term. When I was born Gold was $35.50 an ounce. Now it’s over $1200 an ounce. What will the price be when I retire? No fiat has ever survived and the Dollar doesn’t look any different to me. Just look at government, personal, and corporate debt levels. Look at all the fraud. At some point the world will reject the Dollar and another chapter of monetary history will have been written.
And just how secure was gold in 1933 when FDR forbade its private ownership and ordered everyone to turn it into the government?
Very secure if you had a torch, hammer, and enough smarts to convert it into jewelry.
Just some extra info in regard to your statement.
Yes, citizens were no longer allowed to own gold coins, with exception for those of historical value, but the gold was not confiscated, it was purchased at $21 to the ounce! That was before FDR raised the $ value of Gold to $35!
There are many falsehoods circulating on the Web and late night TV claiming that FDR confiscated gold without recompense or at most paid $8 to the ounce, when the official gold/Oz value was still $20.
Thanks for covering precious metals Wolf. I think you can offer a unique perspective being non biased.
It seems that many of the people who write about gold are very pro gold because they broker it and make a commission, or they hold a large position in gold, making them want it to go up. So they are always very pro gold. And then there are those that do not hold it and like to bash it. But difficult to find good intelligent middle of the road analysis of PM’s.
Gold has had some major ups and downs, and it doesn’t provide an dividends, interest, or cash flow along the way. It had the huge move from 1970-1980 where it went up like what 20X? But if you bought at the peak in 1980 it took 25 years to just get back to that peak price nominally. And inflation adjusted, we are still below the peak in gold 37 years ago. Let a lone the storage costs all that time if you held physical gold. But then it had another great run from 2001 to 2011….up almost 7X.
Im curios when people talk about storage cost for gold. They must plan to buy like a barrel of it.
Yeah right. A stack the size of a loaf of bread is 3.3 million USD.
That’s true of course and people who sell real estate or stocks do exactly the same thing don’t they?
Buy physical and short paper gold.
Interesting. Using physical or electronic dollars?
One day this will be an incredible play, but that day is still a couple of years away at least.
I find your introduction very intellectually honest and eye opening to your values.
Amen to truth sir, stay the course
Wolf Richter: “But we will stay out of the debate as to whether “only gold is money,” whether the dollar, or any currency, should be backed by gold, and the like.”
Appreciated, but the more careful argument is not that “only gold is money.” It is that to the degree people used to be allowed to use anything they want as money, they historically tended to settle on gold and silver. The word ‘dollar’ is derived from the term ‘thaler’ which was slang for a “Joachimsthaler,” a silver coin of respected mint.
Skipping over much important history, the ‘dollar’ was eventually defined as one twentieth of an ounce of gold. The magic-symbol-covered pieces of paper we now think of as dollars used to be ostensibly receipts for gold deposited at a central bank (before executive order 6102 by FDR in 1933).
The oligarchy has long since successfully (by fiat, long story) severed the link between the dollar and gold, but the curious and significant point is that they still insist on sitting on top of the gold they effectively confiscated. They obviously either still consider gold to be money amongst themselves, and/or a threat to the fiat currency they have replaced it with.
Important point: Gold (or any money in general) is no more a capital investment than e.g. houses. They don’t earn interest in the praxeological sense. They are merely assets. They only rise in price as measured by the magic tokens we use as money because the number of those magic tokens increases at the privilege and pleasure of the central banks and the government.
One of the best concepts from FOFOA: Gold is NOT a commodity. It is not used up like silver, wheat, iron, oil or anything else. It remains intact, sitting in a vault (or worn as jewlery) and is still part of the worlds overall supply. This means that there is no reason for a paper market. This is why “paper gold” is different than other ETFs and futures markets for commodities. “Paper gold” is totally superfluous. There are no objective metrics for pricing gold. Its price is arbitrary in comparative values to other goods. It is like a Picasso in that sense.
Perhaps Wolf will be willing to comment on GLD. There is quite a bit of disagreement as to how and why the fund’s holdings rise and fall. I’ve been hoping a competent blogger outside of FOFOA might give it a go.
According to JP Morgan the man ONLY Gold is money and everything else is credit
Frederick, many people keep citing JP Morgan on this. But society decides what money is, not an individual guy.
J.P. Morgan got to be where he was precisely because he had a very good idea of what society thought money is.
Of course that was a century ago. I am reminded of that Mark Dice video where he interviews people on the sidewalk in San Diego and asks them if they’d prefer a one-ounce silver coin or a chocolate bar. All of them picked the chocolate bar, even after they were encouraged to walk inside the coin shop he was standing outside of, and ask the proprietor exactly what the silver coin was worth.
Your chocolate bar vs silver comment adds to my theory that the younger generation values utility and experiences over future value. I don’t know which one I would have chosen, depends on the chocolate.
The video of Mark Dice shows him offering a 10 oz silver bar, worth about 180 USD. And all the people still chose the chocolate bar (face palm).
I wonder if they edited out all the people who just grabbed the silver bar and tried to run with it.
The one with the biggest gun determine why money is, the rest of the human population is forced/nudged/conned into accepting it.
Article 1 Section 10 US Constitution
GLD – That’s an interesting topic. I abandoned the GLD years ago when I couldn’t figure out how the gold holdings related to the buying and selling of shares and it looked like real gold was leaving the system.
I always had the fear with “paper gold” that if the gold price spiked higher they’d just cash you out at the last price they deemed “rational” which would be before the spike. It wouldn’t be the first time gold investors were forced to cash out at a discount.
Anyway, it would be interesting to hear what Wolf had to say on the structure of the fund and others like it.
Paper gold is just that: paper that is priced in relation to actual gold. The sellers may or may not claim the paper represents ‘warehouse receipts’ that signify ownership of actual gold. But, even if the claim is for stored gold in a warehouse, how do you know it really exists? All you have is fiat that represents the possibility of actual gold somewhere at best. At worst it’s just paper priced as gold for the purpose of trading to others who want to buy and sell paper priced as pretend gold.
So, if one trades paper that represents gold and is priced in relation to gold, that’s pretty risky. Actual warehouse receipts are one thing. Active and enthusiastic trading of paper gold is a tell for the return of gold mania since even common sense says paper is not gold.
My understanding is that shares of GLD equate to actual gold held in a vault. Pushing paper around, rather than the physical gold, is the point of it. Who wants to transport gold around when they buy and sell it?
You know the physical gold is there because it’s audited.
Gold in hand vs assured gold represented by paper.
Of course, is gold in hand really gold or gold wrapped tungsten? https://www.popsci.com/diy/article/2008-03/how-make-convincing-fake-gold-bars
On the other hand, a buck is a buck.
bungee: “There are no objective metrics for pricing gold.”
There are no objective metrics for pricing anything. Economic value is ultimately subjective and ordinal, and manifests itself when a person chooses one thing by forgoing something else.
No, I mean there is no supply side shock and gold is not a substantially needed component in a finished product. So it’s not like a manufacturer says “oh no, gold went up now I need to charge more for my product!” Or “oh no, they didn’t mine enough gold this year which means there will be a shortage of my product!” The point is that gold is ONLY used to store value. Also, when a manufacturer buys a commodity, they need a certain amount of it; by weight. But with gold you are only storing value so the price by weight is arbitrary. You are purchasing gold by dollar (or pound, yen etc) amount. See? So if gold goes to $10,000/oz so what? it doesn’t affect the price of a car or a bridge or a cell phone. And you dont care that you got less gold by weight because all you are doing is storing value. Gold stands alone. It is not connected to the rest of the economy. Also, if you see my above comments, Gold is not used up. There is no such thing as a shortage. There can be no short squeeze relative to a “paper gold” market. the paper market in gold is superfluous! Understand this stuff my friend. it is well worth it.
Hi Wolf….I read recently (Business Times South Africa) that a number of SA gold miners have managed to hedge various amounts of production at prices north of $1300 for 2019. Do you have any idea of other gold miners forward sales, and would that be a worthwhile indicator. And thanks for the blog.
Hedging is a smart move for producers that want to protect the price of part of their production. But I don’t think it is an indicator of an upside. It might be an indicator of a ceiling.
Gold mine supply has only a minuscule effect on the price of gold. The stock-to-flows ratio of gold is immense. That’s how you know that gold is a monetary good, in fact.
Right. There is a tremendous amount of above ground stock, unlike copper which gets pulled into wire or oil that gets burned up. You can tell already from the comments that the gold topic is a can of emotional worms. So forget gold as money. Forget the gold standard. Forget Mad Max. Just how in the heck does GLD work? There are two camps – the traditional view is that GLD is actively managed and pulls out gold to sell because investor sentiment is poor. The second camp says that when GLD loses physical gold holdings it’s a preference for physical over paper and that GLD is a gimmick of the LBMA. Wolves like rabbit holes if I’m not mistaken and I’d love his take on this one.
Money is what people believes it’s money.
Indigenous Brazilians used cacao seeds as currency, it’s the most famous case of money literally growing on trees… somewhat.
Do remember a lot of currencies lost value and are losing value this year, There is definitely a relationship between that and gold sudden spike in value.
Heck inside the US the dollar lost value due to inflation, while it rose in value outside the US.
All it takes for a huge (and likely not long) spike in the value of gold is an important crash.
The thing is, I have no clue what’s gonna crash first.
Italian banks? Spanish banks? Something else?
I.mean look at Brazil, did what is happening there cause a spike or not?
Personally, I consider myself a central bank. So I own gold, don’t sell it, and accumulate when possible. If it’s good enough for them, it’s good enough for me.
The weakest central banks are those with the most gold, right?
Yes, the weakest central banks are the ones holding the most gold. If their currencies were strong and others had confidence in their value, they wouldn’t need the gold.
Wait – are you considering the U.S., officially at the top of that list, to have a weak currency in which others have no confidence?
And while the Bundesbank obviously doesn’t create its own currency at the moment, do you also consider it to be “weak”, as it sits in the #2 spot?
And the ECB?
To the degree that central banks are accumulating gold, I consider that a leading indicator, of currency weakness. They are using excess reserves for gold because others will not accept their credit.
In Reply to your response below, “accumulating” and “holding” are rather different.
I would also argue that the Chinese, who in reality almost certainly sit at the top of the list, have been accumulating gold for many strategic reasons.
The Winnebago Fantasy: “When the poop hits the fan we will head for the woods, loaded with frozen dinners, CD movies, and a pouch of Krugerrands. Life will be peachy.
To quote Jeremy Bentham: I hope for those things that will create “the greatest good for the greatest number”. I dread the world of economic collapse that gold bugs seem to wish for.
That’s a not only a straw man, but a particularly dumb one.
Many who choose to buy gold do so as an effort to preserve wealth, and have no fantasies about a Mad Max world, or hitting some kind of lottery.
Dumb? I must be, too. I agree with Boatwright. A great line from the multi-award winning movie, “A man for all seasons” is Moore’s response to his rebellious son-in-law, calling for revolt against the system: “Do you think think you could stand upright against the winds that would blow then?” I would think that a boatload of weapons & ammo would be a better investment than gold, but you’d have to consider nuclear among the weapons. Only 9 nations are believed to have that currency. Speaking of straw men, I’m reminded of “Over the rainbow”. The yellow brick road was the stupidity of the populists thinking that they’re smart following the yellow brick road to Oz. Better to buy a flight to Sydney than follow the y. b. road to Oz.
I love all these people deriding the guys who have faith in gold. What is their faith based on? A US government which is 20 trillion in debt and digging the debt hole deeper by 1 trillion every year? A world where debt is equal to 225% of GDP? How do you think that debt is going to be repaid? It’s not – it will be defaulted and inflated away. Gold is just a way of making sure that I have now I will have tomorrow. No more no less.
Escierto: You nailed it!
I wish trading was as simple as looking at cot reports. As I see it the chinese were buying 2008-2011 and the Fed was injecting liquidity going everywhere including gold.
We now have the opposite. The chinese consumers are scaling back due to trade war, the fed is withdrawing liquidity, the dollar is going up as a safe haven. Fundamentals do not favor gold. Once things crack up in the coming weeks or months 50,000 is not unreasonable. Before that 980 is not unreasonable.
I’ve been following the gold market closely for almost two decades, and it’s funny seeing exactly the same goofy arguments and misconceptions about gold today as I did back in 2002 when I first started looking hard at gold. There truly is nothing new under the sun, and the sum total of human ignorance never seems to change.
If I’ve learned one thing, it’s that the price of gold is almost entirely driven by expectations of future real interest rates–real interest rates being the nominal interest rate minus the inflation rate. When the market expects that future real interest rates will approach zero or go negative, then the gold price rises. When the market expects that future real interest rates will be above zero and rising, gold price falls.
Note that nominal interest rates are irrelevant outside the context of inflation. If nominal rates are rising more slowly than inflation, price of gold will rise. If nominal interest rates are stuck at zero, absent an actual deflationary environment, the price of gold will also rise.
Real interest rate (federal funds rate minus rate of inflation) has been negative for almost the entire time since 2008, and is still negative today. During those 10 years, the price of gold soared for the first three years and then plunged for the next seven years. This data shows that there is little or no correlation between real interest rates and the price of gold.
The level of real interest rates isn’t that important, it is the trend of real interest rates. If the trend is down (falling real rates) gold rises, if the the trend is up, gold falls. 2011 – the year gold topped – was both a trough and a trend change (downtrend to uptrend) in the real interest rate. That in turn reveresed in early 2016, and real interest rates resumed their – in my opinion – secular downtrend. After the 1929 crash, real interest rates fell for almost 20 years until they bottomed in 1946. The journey was volatile of course, as the recessions/depressions during that time saw high real interest rates intermittently: https://i.imgur.com/Xhywp1K.png
In the absence of a gold standard actual deflation is highly unlikely if not impossible if the monetary authority is hellbent on avoiding it. In my view, that simply means that real interest will only oscillate between less negative and more negative after a financial crisis such as 2008. That is of course a highly contrarian view – if the market shared this view, gold (and possibly silver) would be trading much higher. I think that the market will wise up at some point, which will see gold more or less permanently revalued during the coming decade.
Precisely–it’s EXPECTATIONS of where real interest rates are going that is the driver of the gold price, not the actual level of the real interest rate. The gold price is driven by the futures market, and futures exchanges allow massive leverage on the order of 30-1. This makes the gold price very schizoid in the short term, but over a longer time frame it does track the general trend in real rates.
I am just a simple accountant and base most of my thinkings on suply and demand, return on investment and tax avoidance.
I think interest rates have very little to do with the price of gold.
Interest rates used to be the same percent as inflation.
Interest rates used to be 6% on average before.
With interest rates at zero or near zero and when increasing at only a base point or two would therefore have no effect on the price of gold.
In Switzerland there is negative interest rates on bank savings. There is also government annual tax of about 0.2% on capital.
You can rent a safe deposit box in a bank in Switzerland for US$70 per annum that will fit physically fit about 40 kilos of gold (say about US$1.5M).
I saw what happened in Cyprus with a 38% capital tax on bank holdings of more than Euros 100,000.
It therefore makes sense to keep real gold in a safe deposit box than cash in a bank account unless gold is going to fall.
Everyone discusses the price of gold in US Dollars.
We have seen how much the rubble fell (45%) when sanctions were made against it.
We have seen how Venezualian, Brazilian currency has crashed recently.
I have even seen how the UK pound has fallen against the US Dollar, especially since Brexit.
But I have also seen the Thai bt increase against western currencies over the last few years.
I mention the Thai bt because you can buy and sell Thai bt ingots over the counter in most reasonable sized towns with no tax (unlike the EC) and the market price (buy and sell) is stated by the government.
I would have expected (I have been wrong) that gold would have gone up on my demand theory:
1) The poulation of people is increasing so therefore less gold per capita.
2) Asians are big buyers of gold and it it their population that has been increasing.
3) Asians are getting wealthier compared to westerners.
To those that cite an ever increasing demand for gold from a growing middle class in India and other emerging markets, you are in for a big surprise. The millennials there don’t share the same value system as the older generations.
Just watched a middle class Indian girl on a fashion blog show off all her fake bangles, with finishes good enough to look like gold, which she wears to weddings and other important events. She also showed pieces belonging to her mother. All the pieces were purchased at 500-2000 rupees, which is US $7 to $30. So much for gold demand from the emerging markets.
You arrived at that conclusion after watching a middle class Indian girl on a fashion blog show?
If you knew that the conventional wisdom in India is that gold is valued beyond all things, and its women especially are valued in ration to the value they add from owning it. Then you would understand that a middle class millennial girl bragging about her fake jewelry on a vblog constitutes a break with the conventional wisdom.
If women in the younger generation don’t care about owning or holding gold, in an economy most known for creating demand from women holding and owning gold, then the future demand for gold in India is down from here.
Peter Lynch, the great mutual fund manager, was asked how he came up with all those great stock investments. He said he watched what his kids and their friends were buying. Or in the case of gold what they are not buying.
I was referring more to the problem of extrapolating from a single fashion show blog.
I don’t doubt that the current trend is for younger Indian women to purchase less gold than their mothers, and for a variety of reasons, but let’s see what happens after the next crisis, when their paper assets are in tatters.
A ballplayer broke his gold chain when he took a huge swing (and a miss) and they called timeout and spent quite a while picking up the pieces. You can’t fake gold, fake gold jewelry looks exactly like you think it should look. If these Indian girls are playing with fake gold its because next year they will be wearing the real thing.
When china detaches renminbi from dollar and backs it via gold, that will be the time to be in it. Central banks are accumulating gold at levels never seen before in the paper trail times……1060 and I’m a buyer…..
Gold is a CONFIDENCE indicator. Now confidence is relatively high in the US so money is pouring into the dollar and equities priced in dollars. Thus the dollar price of gold has been soft. In other countries the price is rising. ( see Martin Armstrong’s blog for why)
For example (we live in Mexico) four years ago when silver was $17 an ounce we bought 1oz silver libertads with spare pesos. (10pesos / $)
In January 2018 silver was $17 / oz again. BUT had we sold our silver libertads then we would have gotten TWICE as many pesos because the peso dropped in value against the dollar from 10 pesos to 20 pesos in those 4 years. Thus we urge our Mexican friends to save in silver ounces if they can’ t earn in dollars.
IF and When the world loses confidence in the dollar gold will soar in dollars as it already has in Venezuela, Argentina, Turkey, in their currencies. Also see what it is doing in Canadian, Australian and all other currencies.
Buy low sell high. Don’t buy when everyone else is. Don’t sell when everyone else is.
Buy in your AU at £450 or your BTC at £150 and you’re laughing.
Wait out two business cycles and you can’t really go far wrong.
Trying to time manipulated ‘investments’ is crackers unless you’re the ones running the show.
I like silver but in the UK it has 20% VAT, and EU sellers who have lower VAT just charge more for it.
That kinda ruins it as an investment as you’re 20% down right away.
No ‘used’ sellers sell sans VAT or the equivalent of the VAT value… until you try sell it wholesale and get 20% less.
PMs are a joke wrt spreads on physical.
Buy and hold long term. 15-20yrs+ 10% towards your retirement fund say.
I dont understand how there can be a short squeeze in the gold futures market. Unlike in the stock market nothing was sold that had to be bought back. which A futures contract comes into existence if there is buyer and a seller and the agree on a price. The owner of a futures BUY contract can demand physical delivery, but the seller can supply paper gold. No gold (or silver) must be delivered. So how can there be a “squeeze”? Nothing needs to be bought back!
I’m thinking of swapping some of my fiat £s for something that’s not losing value with time (and likely to do so for a long time to come). I don’t know how gold will go, so am not keen on it, besides I have no experience of buy/selling it. I do expect bitcoin to increase in value with time and see it as the best store of value for someone like me (with my limited savings). I wonder whether the youngsters (who have money to save) think the same way as me? It’d be interesting to know in what the different ages/generations are storing their spare cash?
 My expectation is base on the development that’s going on with 2nd layer solutions, such as Lightning Network) not on whether the SEC grants a bitcoin ETf (which I prefer it didn’t).
Hi Lavery. I am very pro physical gold as savings. (I am 37 yrs old since you asked). Physical gold is very easy to understand yet endlessly interesting in it’s history. It is not an investment, but a savings. remember that difference. I own cryptos as well. They are extremely complicated and have no history. They are a joke that I am fortunate enough to be able to play with. Physical gold is something I can live off of in old age and pass on to my children. I buy them in person at a coin shop; you cant go wrong with a 1oz. Canadian gold Maple. I write to you out of concern that you may put your savings into crypto. Please be careful.
Bitcoin’s not complicated once you grasp the basics, in fact it’s less complicated than fiats such as the $ and £, IMO. Gold will likely do better than the $ etc in the long run but it will lose relative to bitcoin, IMO. If all you follow is bitcoin’s price then it’s boring, the development that’s going on is where it’s at. I’ve never been motivated much by money. Maybe that’s why I haven’t much, but I ‘m lucky in that I have enough. I know others who have far more than I have but still haven’t enough.
 Unless you go into the depths of Schnorr signatures and such, but that’s not necessary if all you want to do is decide, for yourself, if it has value in the long run (which I reckon it has).
 But that’s not saying much about gold.
So, investors of PM’s hold them until the sky falls, wait for a reset on the dollar and then trade their PM’s for paper money. In the meantime (could be decades), you get to open your safe and glare at the shinny stuff through rose colored lenses. Contrarily, had you bought rental properties on the down side (that’s when you buy PM’s too, right?), your monthly “dividends” could be used to purchase more RE or PM’s, without tapping into your initial investment. My RE investments bought in 08’ & 09’ have tripled in value, not including my monthly dividends (i.e., rents). I think I will stay with RE! Wolf said it, PM’s, like the SM, are manipulated, not that RE isn’t, but rents remain fairly constant.
It is the headache and upkeep and expense and legalities of RE (especially rentals) that makes it unreasonable for most of us to even WANT to invest in. It takes a great deal of expertise with a mean learning curve and lots of competition. Also, you cant just by a “small slice” of a house but must take the whole thing, almost always plunging the new owner into big-time debt. Gold on the other hand just accumulates in the safe waiting for it’s time. “jus chillin” as they say.
Ah so, maybe do like Buddha and take the middle path? A bit of PM, some rental property, some stock, some bonds. When you notice extreme valuations in one asset sell and purchase more of the undervalued assets. Not timing the markets but reallocating your investments to outperform in the long run. Hmmm, but it’s difficult to sell when things are going so well…
Support/resistance line is 1200. The seasonals last several years have been unfavorable for gold prices the second half of the year. There is a bullish trend line under the lows since 16, which has broken, and such things often get a retest. 1080 is the likely objective. While a few contrarians will sell the Dow and buy the GLD, performance chasing hedge fund managers are going the other way, they will sell the rally. Gold seems to do well in a good overall economic environment (you need money to buy gold). Investors are liquidating real assets, gold, property, RE, and buying FANGS (to meet their margin calls?).
Wolf; Thank you for this article, not only because of the content but because the comments on this web site are interesting to read (more intellectual level of contributor) than say ZeroHedge.
Second that, Cashboy. Completely unmoderated comments sections tend to become sewers of intolerance, aggression and name calling, and drive away more empathetic and considerate posters, and they thus get left mostly to the more harsh and unforgiving amongst us.
I would like to differ on the premise of contrarianism in the above article. In fact, since Friday, many if not just about all analysts are all extremely bullish on gold, based on data such as that presented here, and that this is the point to load up. Thus, a contrarian view, for example, could be that this is a rally for precious metals, however other headwinds, such as the trade war, could be in effect, thus limiting it to be a rally. The fact that gold rallied strongly post-Fed speak, rather than being convincing instead raises doubts, since many post-Fed speak strong market moves are afterwards seen to reverse.
The key word was “temporary” which appeared three times, including in this phrase: “Very large short positions that have already been established put a floor under the asset price and provide temporary firepower on the upside – the emphasis being on “temporary.”
now there is more than 1 d as well how is this?
Yeah, if the other “d” shows up again, I’ll ask him/her to add a couple of letters to it to keep you guys apart :-]
But there are also several Mikes here, and the like. So this is not a unique problem.
thought I should add a gold story here, under the disclosure that I have friends and family in mining and geology, and this story was told to me contemporaneously by friend/family member who was present at the meeting:
Year 1999, a major miner (base metals) called a meeting to talk about gold: strategy; do we have a strategy; any ideas that sound good NOW, i.e., 1999 ?? (for great perspective on this, go to onlygold.com, and look at their chart for closing prices of gold/year, going back to 1792)
At the meeting, my friend suggested exploring the purchase of one of the world’s low-cost producing mines; some were in production at under $200/oz.. Note from the onlygold chart that gold had not closed, for the year, above $400/oz., for a decade.
The CEO, at the meeting, announced that gold would “never go above $400/oz. again”. And the major miner put any thinking about gold exploration/mining to rest. Well, at least until the price of gold shot up again, and they wished they had a gold mine of course.
Mining is capital intensive, and permitting intensive, and carrying-costs intensive, and to a greater degree than in many other industries, vision and patience are key to success.
IMHO, the same sort of patience should apply to PMs as part of one’s portfolio- buy low ( and probably give to the grandkids when one is into one’s endgame).
Back to mining, some guys just do want to go out and break rock. And, yeah, it’s one of the few remaining American industries where a middle-class guy can earn good money. Loved those Sunshine Silver coins: “the journey of a thousand miles…”, wish I had a hoard of those (collecting art and silver simultaneously), but that’s another story…..
The central banks of the world seem to believe gold is a good store of value. If one country refuses paper money for their products, or sanctions prevent it, gold can be offered. Iran takes gold for oil.