The Canary In The Coal Mine
The expression “canary in the coal mine” derives from the use of canaries in coal mines as a form of an early-warning for the miners. Wikipedia explains:
An allusion to caged canaries (birds) that mining workers would carry down into the mine tunnels with them. If dangerous gases such as methane or carbon monoxide leaked into the mine, the gases would kill the canary before killing the miners, thus providing a warning to exit the tunnels immediately.
Financial and economic analysts often use this metaphor to describe key variables. When the particular element representing the canary begins to misbehave, it is time to get the hell out of that situation. Depending upon the market, different variables can serve as the canary. Gold is often considered to be the King Canary, at least for those who are focused on maco-economic events, especially those resulting from massive government interventions in markets, money creation and interest rates.
The Take-down of Gold
The recent take down of gold appears to have been orchestrated by government via the banking system. Numerous websites discuss the circumstantial evidence that suggests government was involved. Simple statistics support something other than normal market behavior happened. Other analysts discussed reasons why a take-down of gold was important for government, the Federal Reserve and the banking system.
In a world of paper gold (ETFs and futures), it is not difficult to engineer a manipulation.
The gold crash occurred over a two-day period and received enormous publicity. That is exactly what you would expect if you wanted to frighten people away from gold. Contrast that with the silence that accompanied gold’s rise from $250 to almost $1,900. It was the best-kept secret bull market in history. Gold averaged about a 16% gain per year for 11 years and the public hardly knew.
So what happened since the collapse? Gold has made a rather nice rebound.
The Recent Movement In Gold
I will use GLD, the gold ETF, as a proxy for gold. On Thursday April 11, GLD closed at $151.26. Friday and Monday were the crash days. At the close on Monday (April 15), GLD was at 131.31. It was as low as 130.51 intra-day. Yesterday (April 25) GLD closed at 141.63. It hit 142.08 intra-day. The following daily chart summarizes the action:
The huge drop was terrifying for many gold investors. Stops were triggered and gold went into free-fall.
In the eight trading days since the bottom, gold was up seven of the eight days. Of the twenty points GLD lost in two days (about 200 points in the price of Gold), more than 50% of the loss was recovered in the subsequent eight days. Whether this recovery is an elongated “dead-cat” bounce is for you to judge.
Three important factors likely motivated the recent take-down of gold:
1. Gold as The Anti-Currency
Market manipulations by government are rarely telegraphed and often surreptitious. There are good reasons to believe that government was behind this plummet in gold prices and innumerable articles on the Web discuss this likelihood in great detail. Gold is government’s nemesis. When gold is doing well, it means fiat currencies are being counterfeited. That is exactly what is happening all around the developed world.
If you measure the dollar against the Euro or other currencies, one will always appear stronger because you are using a relative measure. In reality, both are being debauched, the one being destroyed at a slower rate will appear stronger. Measuring fiat currencies against one another is like measuring the particles floating in a septic tank. At various times particle “A” will float higher than particle “B,” but so what! We all know what is in a septic tank!
Gold is not in a septic tank. It is an absolute measure that cannot be counterfeited. Its value is reasonably fixed in terms of other real goods. When gold appears to rise in terms of some fiat currency, it means that fiat currency is depreciating. Government does not want you to know this. Hence, when things are not good, break the thermometer that we call gold or remove the canary from the coal mine.
2. Cutting Off An Escape
A related event of importance, which I believe has not received enough attention, is the Cyprus bank “bail-in.” Telegraphing to Europe and the rest of the world the fact that deposits in banks are no longer safe was a government act of idiocy. For those who believe government is terminally stupid, Cyprus was an act which exceeded even these low expectations.
Actions regarding the confiscation of assets (retirement accounts, pensions and other wealth) are routinely discussed by those who know there is no way out of this mess. The actions in Cypress validated these ideas to a large portion of the masses who otherwise believed such talk to be “kook-babble.” Cyprus demonstrated government’s willingness to do anything to survive. It telegraphed the danger to non-believers.
Gold is a natural escape for storing wealth. It has been for thousands of years. It cannot be debauched like fiat currency, and it is easy to hide or transport. In short, it is the perfect money (and this is why government always tries to discredit it).
The reason to flee banks was established. Once that cat was out of the bag, it was necessary to destroy the key means of escape — gold. Not attacking gold ran the risks of bank runs and wealth disappearing from government control.
I do not believe that Cyprus and the signal it sent to citizens around the world can be overstated. It revealed the true nature of government and the danger that we all face.
3. The Dishonesty in the Gold Markets
The amounts of gold claimed to be held by various financial intermediaries, including the US Federal Reserve and perhaps Fort Knox, seem to be fallacious. There has been no public, physical audit of these stocks for many decades. Rumors have been circulating for years that the Fed has leased out its gold to bullion banks, who then have sold it into the marketplace partly as an effort to depress gold prices.
Sovereign countries store a lot of their physical gold in the US. Recently, Germany requested a return of their physical gold, a process that should take about a week to accomplish. Germany was told that it would receive its gold over a period of seven years! Does that make you wonder whether the gold is actually where our authorities say it is?
If the gold was leased and then sold into the marketplace by bullion banks, then these banks have to buy it back to be able to return it. Most of this gold was sold at much lower prices than today, making it virtually impossible to buy it back without bankrupting many of these institutions. Similarly, rumors of massive short positions in gold by large investment banks suggest further bankruptcies or financial hardships should this gold have to be delivered.
All of these political problems are lessened when the price of gold falls.
Did Government Shoot Itself in the Foot?
The reaction to the gold take-down has been rather remarkable. The manipulation of the paper market in gold has created enormous demand in the physical markets. Gold dealers have seen runs on their inventory by customers. Many have trouble keeping gold in stock. Michael Snyder reports:
The crash of the price of paper gold on Monday has unleashed an unprecedented global frenzy to buy physical gold and silver. All over the planet, people are recognizing that this is a unique opportunity to be able to acquire large amounts of gold and silver at a bargain price. So precious metals dealers now find themselves being overwhelmed with orders in the United States, in Canada, in Europe and over in Asia.
Will this massive run on physical gold and silver soon lead to widespread shortages of those metals? Instead of frightening people away from gold and silver, the takedown of paper gold seems to have had just the opposite effect. People just can’t seem to get enough physical gold and silver right now. Those that wish that they had gotten into gold when it was less than $1400 an ounce are able to do so now, and it is absolutely insane that silver is sitting at about $23 an ounce. If the big banks continue to play games with the price of gold, we are going to see existing supplies of physical gold and silver dry up very quickly.
And once reports of physical shortages of gold and silver become widespread, it is going to absolutely rock the financial world. But this is what happens when you manipulate free markets – it often has unintended consequences far beyond anything that you ever imagined.
It seems that government’s attempt to discredit gold has served to awaken the awareness of gold’s value as a protection against predatory government and an economic future unlike anything we have seen before.
Jim Sinclair summarizes my feelings with two quotes from a recent email:
“Nothing will unnerve the paper gold shorts more quickly and do more to undercut their confidence than to strip them of the real metal and force them to come up with more hard gold bullion to make good on deliveries. “Stand and Deliver or Go Home” should be the rallying cry of the gold longs to the paper gold shorts.” –Trader Dan Norcini
QE to Infinity, followed by Gold balancing the balance sheets of the sovereign balance sheet disasters. Just as there is no tool other than QE to feign financial solvency, there is no tool to balance the balance sheet of the offending entities other than Gold. It is just that simple. –Jim Sinclair
Nothing is simple in investing or trading. Matters are especially more complicated when markets are no longer dominated by economics but by interventions. The closest thing to a sure thing (and there are none) was gold, given the bankruptcy of sovereigns around the world. That sureness played out as gold rose from $250 per ounce to a high of $1,900 in the space of eleven years. Whether it was ever a sure thing is irrelevant. It is a better thing today than it was two weeks ago. Nothing has changed except that it is cheaper.
It will be a bumpy ride and one with institutional ambushes along the way. But it may be the only vehicle that can get you through the chaos ahead. A friend of mine (NII), summarizes your choice quite succinctly:
So who do you trust; a 5,000 year history of GOLD persevering over fiat currencies in preserving value or a handful of MIT academics controlling some of the largest Central Banks in the world openly admitting they are experimenting with your currencies/savings? The game is far from over as to who or what determines the price of GOLD.