Here’s the news of the week – and how we see it here at Mcalvany Wealth Management:

It Was the Best of Times; It Was the Worst of Times … or Something Like That

Over a million gold futures contracts traded hands between last Friday and Monday. That’s the equivalent of 107 million ounces or 3,350 tons of gold, which comes to about 74% of the world’s expected gold production for this year (if you include Tuesday’s trade, 4,666 tons traded hands). The majority of the volume was to the downside, with gold shedding 9.11% and silver 12.50%. The two-day period marked one of the most volatile times in metals history, registering somewhere near eight standard deviations (or an 8-sigma move) from the mean. To put that in perspective, a five standard deviation move occurs every 4,776 years (thank you, Dennis Gartman).
To say the least, the selling spree that ravaged the precious metals market was very rare, and it sent a horde of leveraged speculators packing as stop losses led to margin calls in significant order. As we have come to understand from various sources, the physical buying of gold over the same period of time more than doubled, and absorbed much of what was sold in U.S. paper markets. Shanghai has depleted its stockpiles of gold bullion, as we reported last week, and is awaiting fresh supplies due next Wednesday from London and Switzerland.

We admit that we did not see this coming, especially when the fundamentals for the precious metals are getting stronger with each passing day. It will be cold comfort to those caught in the crossfire, but this sell-off caught many of the most savvy and/or largest gold investors by surprise. The old adage applies: One can be right, for the right reasons, at the wrong time. What isn’t a surprise, at least not to us, is that someone – not to name names – is becoming increasingly desperate to control these markets. Their goal, we believe, is to hide the mounting fiscal and economic concerns the country is facing.

We doubt they can keep up the charade for very much longer. Goosing stocks higher while suppressing the barometers of inflation using massive amounts of printed dollars will eventually prove disastrous for the U.S. dollar (which is introduced via QE to achieve these goals). In the race to debase, the U.S. (compared to the BoJ, the ECB, and others) was slow out of the gate (beginning last November). This helped the dollar look relatively strong for most of this year. But now that the Fed is firmly on pace to print in excess of $1.1 trillion this year, we expect that the dollar’s day in the sun and gold’s time in the cellar will draw to a close.
Away from the metals, stocks were clubbed earlier in the week following the unfortunate Boston Marathon incident. Granted, stocks were already toppy and 1st quarter earnings have been mixed (banks somewhat strong and tech weak – a familiar refrain), so we suspect the events in Boston were simply a catalyst. Treasuries managed to eke out a small gain, while the dollar bounced nicely off its 50-day moving average (see box scores). Foreign bourses saw the same weakness, with the exception of Japan’s Nikkei-225 – which feeds on an exponential increase in yen production each week.

Next week, we should get a good idea as to where traders want to take the metals. Gold appeared ready to break out to the upside early Friday morning after receiving strong bids in overnight markets. However, it faded through the day, with traders nervous about the G20 meetings and/or holding long positions through the weekend. Since it’s becoming evident to many that gold’s recent decline was a large and rare anomaly, a return to the 1485 level (where the slide began) would be reasonably justified.

Best regards,

David Burgess
VP Investment Management