Why are gold prices going down?
![]() The story behind the gut-wrenching US$300 drop in gold prices.
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Many ways to skin a cat
Under the guise of ‘modern’ economics, some fundamental truths have not been remembered, over the last 50 years. Importance of gold in the world monetary system is one of these ‘forgotten’ truths.
This has damped down gold prices – and printing presses have been busy printing money. Especially in the last 40 years – after the Nixon Chop.
24 hour coverage of financial markets has also created an impression that financial cycles play out in a matter of hours and days. So also, the the drop in gold prices of the last two weeks.
Many people have been puzzled over the last few months by gold’s (GC2G -0.19%) behavior. It has tumbled since the start of September from around $1,900 an ounce to below $1,600. This has happened even while a financial crisis has erupted in Europe which, says traditional analysis, should be bullish for gold.
But there are a couple of other factors at play.
First: Gold hasn’t fallen as far as it looks. The gold price is typically quoted in U.S. dollars. Yet in the past four months the dollar has rallied.
At the start of September, when gold touched $1,900 an ounce, the dollar was $1.45 to the euro. Since then the euro has slumped to $1.30.
Net result? Gold, which traded at around 1,300 euros per ounce back then, has declined to 1,200 euros per ounce now.
The second factor: Sentiment.
Four months ago, sentiment was massively bullish on gold. It had just skyrocketed, in the wake of the U.S. debt ceiling debacle. According to data published by the Commodities and Futures Trading Commission, speculators and traders had taken nearly record speculative bets that it would rise further.
This usually precedes a backlash, and so it has been.
Today? Sentiment is pretty bearish. The CFTC says the number of speculative bets on higher gold have collapsed by more than a third. (via Will the Europeans have to sell their gold? – Portfolio Insights by Brett Arends – MarketWatch).
A bump on the road
The first 15 days of December, 2011, has seen weakness in gold prices – falling from roughly US$1900 to US$1600. The biggest drop, after ‘gold dropped 25 percent in the fall of 2008 — from over $1,000 an ounce to about $750’. Broad parameters of the situation were similar then – as now.
In 2008, the US economy was tanking, and gold was at psychological barrier of US$1000. This time around gold is at US$2000 psychological mark. And it is feared that the Euro-zone may collapse.
“The worst case scenario (a euro zone break-up) was pretty much ridiculous a year ago but it is now becoming more and more possible, to say the least,” Juan Valencia, credit analyst at Societe Generale, said.
This time around
So, what are the specifics now.
First are the European banks. It is reported
banks face about 320 billion euros in senior and government guaranteed debt redemptions next year. By comparison, they had issued just 12 billion euros of debt in the past six months.
With no solution to the euro zone debt crisis in sight, interbank market players say they are reducing credit lines to an ever increasing number of banks.
“It is utter madness … When we see big names paying 300 basis points over overnight rates for dollars you know something is wrong,” said the head of money markets at a bank in London, who asked not to be named.
“Credit lines have already been reduced, we are seeing the big names paying through the nose for cash from corporates as wholesale is pretty much dead. The focus now is for the core banks to raise cash through the retail/corporate space. Central banks may be called upon.”
French banks’ borrowing from the ECB topped 100 billion euros in the maintenance period ending November 8, compared to 87 billion euros the month before. French banks are more exposed than any those of any other euro zone country to Italian, Spanish and Greek debt, with holdings in excess of 600 billion euros, according to Bank for International Settlements data.
Of the contributors to daily Libor rates, French banks BNP Paribas, Credit Agricole and Societe Generale say they pay the most for three-month dollars, around 0.6 percent. But dollar rates have recently been on the rise for other core country banks as well.
In such an environment liquidity is at a premium. Some investors are even taking money out of banks and paying to keep it in short-term German or Dutch government paper, which is trading with negative yields.

Where has all that yellow stuff gone? Buried under a mound of silence? | Cartoonist – Dave Simonds on 18-6-2011 in guim.co.uk | Click for larger image.
Where is gold coming from
Negative yield brings us to another grey area.
Gold lending at negative rates. Europe has an organized market where gold owners can lend gold to borrowers – at rates varying between 0.5% to 2%. There are ominous whisper-reports.
The partnership between the Federal Reserve and European Central Bank to provide hundreds of billions of relatively low-cost dollars for euro-area banks should have relieved the pressure to come up with greenbacks. Yet gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There’s not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks or by gold exchange-traded funds.
There is also a third source of gold that is being lent in the market. Gold that does not belong to any European Governments or to any ETF.
But obtained from deposed Middle East rulers of Egypt, Tunisia, and Libya.
Cash is king
Regardless of the source of gold, the cash situation at European banks remains a trigger for this gold sell-off.
The need for cash has overwhelmed gold’s traditional status as a safe haven in past few months, putting the metal on course for its first quarterly fall since end-September 2008 when the global credit crunch was at its worst.
“With access to liquidity being constrained, market participants have increasing problems to refinance,” Credit Suisse said in a research note. “As a result they have to sell their assets – including precious metals – to raise the much needed cash. This is the main reason why gold prices fall on days of increasing funding stress.”
This has obviously raised concerns in the Asian markets – the main buyers of gold. This extra supply of gold from European banks has led to a sell-off – led by Asian markets.
In recent weeks the gold price has fallen significantly from around $1900 to $1535 (intraday). Gold is now trading near Q3 target of $1650. The size of the move was far more significant compared to other recent unwinds, like those in May or August. One of the key factors for long-term bullish view on gold is Asian demand – the majority of end-user demand for gold is from Asia. From an Asian valuation perspective, gold is also relatively cheap.
One way to proxy Asian demand for gold is to look at how gold performs during Asian trade. Over the past few years, gold has generally appreciated during Asian hours, reflecting strong demand for the metal. However, recent weeks have shown weakness in Asian hours. On previous occasions when gold traded poorly, such as in May and August, it remained relatively robust during Asian hours, with any sell-off tending to come in London and New York hours, suggesting that Asian investors were supporting an unwind of Western investors’ long gold positions.
This contrasts with the recent fall, noticeable across multiple time zones. In the very short term, we believe a reversal would need to be led by appreciation in Asia. Although a few data points do not constitute a trend, on Tuesday and Thursday gold rose by 2%, its largest moves higher during Asian hours since October 2008 and perhaps a signal that it could be turning back up.
Gold often trades like a risky asset. This has been evident in recent weeks where we have seen a strong positive correlation between gold and the S&P500, which we use as a proxy for risky assets. The rationale is that heavy losses in risky assets forces investors to unwind other positions to free up cash. As a liquid asset and also with heavily extended net long speculative positioning heading into this episode, gold has suffered.
The price-drop also generated sell-orders based on stop-loss triggers at US$1700. For the time being the stampede has abated. Asian markets were at the forefront of some investment demand.
Gold rebounded in thin trading during the Asian session Friday, paring some of this week’s losses with traders expecting gains to hold in the near-term with some dip buying likely amid a modest bounce in stock markets. The yellow metal rose more than 1% in the session to a high of $1,589.90 a troy ounce after falling for four consecutive days this week.
A Hong Kong-based trader said there is some investment demand, which is driving up prices. Some speculators have also returned to the market after prices fell sharply this week. Despite the slight improvement in sentiment, however, investors continued to be wary of the European sovereign debt crisis.
There is hardly any dissonance between various reports – which supports a belief that this may have a momentary technical correction before gold breaks the US$2000 per ounce barrier. In a year, where most asset classes have performed badly and market volatility took away whatever little was left on the table, fund managers may have locked in their profits on gold for the year. Remember, this is also the time of the year, when bonuses get calculated. The long-term fundamentals of the gold remain beyond argument.
Even in the short-term, this maybe a buying-opportunity one may regret having missed.
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Mystery of the missing Russian gold
As the Soviet Empire crashed
In November 1991, the head of Gosbank the Central Bank of USSR, Viktor Geraschenko confirmed that USSR had less than 400 tons of gold reserves – and not the 1000-1500 tons as estimated. Russia, which has been one of the world’s Top 10 gold producers for the last 100 years, to have a paltry less than 400 tons of gold as reserves created a flutter in the IMF, World Bank, and the Western world. Where did this ‘estimated’ 1000 ‘extra’ gold go?
The declared gold reserves of Gosbank in mid-1937 were 374.6 tons. No additions were made after that, and the reserves were turned over to the People’s Commisariat of Finance. The size of of the reserve had been kept secret since the late 1930s. Geraschenko wrote to Gorbachev on November 15, 1991: “It was reported in October of this year that the official gold reserves of the country are only 240 tons. The declared level of official gold reserves, which is one of the most important indicators of a country’s solvency, is not commensurate with the status of a superpower and leading gold producer, according to experts. Reports of the size of the USSR gold created confusion among specialist on the gold market, who had previously estimated them to be 1,000-1,300 tons”. (via Collapse of an empire: lessons for modern Russia By Egor Timurovich Gaĭdar, page 238).

A preachy and superior writer on the Soviet implosion
After Gorbachev’s ‘perestroika’ and ‘glasnost’, as the Russian economy was loosening the grip of the CCCP, the Russian Central Bank set-up an
“offshore firm, Financial Management Co., known as Fimaco, based in Jersey, the Channel Islands, to handle Russia’s foreign currency reserves. By one estimate, the offshore fund managed $37 billion between 1993 and 1998. The firm was a subsidiary of Eurobank of Paris, which is 78 percent owned by the Central Bank.”
The Washington Post revealed in another report how Russia,
funneled billions of dollars in Russia’s hard currency reserves through… Fimaco … Documents disclosed by The Washington Post showed that some of the money was then pumped back into Russia’s high-flying government bond market in 1996, in the months before President Boris Yeltsin’s reelection.
One of the few journals to get this story right was Businessweek – based ‘on-the-ground’ whispers.
Managing the Russian Central Bank during the mayhem
Described by Jeffery Sachs, repeated many times by Western bankers, as “the worst banker in the world”, Viktor Gerashchenko was chairman of the Russian Central Bank. Twice: the first time from 1992 to 1994, and the second time was after the default crisis of 1998 – upto 2002; resigning after “expressing opposition to proposed legislation that aimed to make the Central Bank subordinate to a new government led body, The National Banking Council.”
Without any conspiracy theories
For Russia, as one of the Top 10 producers of gold, to have 1000-1500 tons of gold would not be excessive. But between 1971, after the Nixon Chop, in little time, dollar value depreciated from US$35 per ounce of gold to US$800 in 1980. Over the next 20 years, through various clandestine methods (check out the Edmond Safra and the Yamashita stories below), gold prices were ‘managed’ and brought down to US$225 per ounce. Co-incidentally, along with oil prices. This reduction in gold and oil prices simultaneously, severely undermined the health of USSR’s economy – these two being the most valuable ‘hard currency’ exports from USSR.
A simple explanation may be that the central bankers of the erstwhile USSR used a lot of that gold to ‘support’ alliances. Much in the manner of the USA, which does the same with its USCAP system. To this add the possibility that Soviet apparatchiks did not want to divvy up Soviet gold with members of the CIS and the subsequent splinter countries of the USSR, or lose it to ‘impatient’ and ‘opportunistic’ Western creditors.
This ‘unexplained’ reduction in gold reserves, was done according to Gosbank head, Gerashchenko, to “to avoid the seizure of assets during talks with foreign governments and private creditors on the restructuring of Moscow’s Soviet-era debts.” Russian authorities also “questioned the $50 billion figure reported by Skuratov. They said $1.4 billion was the most FIMACO ever managed at one time, in 1994”. After his stint at Gosbank, Geraschenko became chairman of the Yukos board. Yukos is the company that belonged to the jailed billionaire, Mikhail B. Khodorkovsky.

La Leopolda at Villefranche sur Mer, France, the former home of King Leopold, Gianni Agnelli and Edmond Safra.
Death Of Edmond Safra
Friday. December 3rd, 1999. TV channels (in India too) announced that Edmond Safra died in mysterious circumstances – at his villa in Monaco.
Based out of Monaco, a known off shore finance centre, Edmond Safra was reputed to have been in the know and arranged numerous gold dealings. His claim to fame was to ‘arrange’ the evacuation of Sephardic Jews, with their wealth from various West-Asian and Middle East countries between the 1920-1960s. He was ‘whispered’ to be behind the George Soros run-in with the Bank Of England gold sale and physical delivery.
The US FBI was conducting investigations about money laundering through Safra’s bank by the Russian ‘mafiya’, based on information given by Edmond Safra. Behind many of these money transfer and manipulation operations through Safra’s Bank, was the Russian ‘mafiya’ – and lubricating these transactions, were hundreds of tons of Russian-Soviet gold. Sold through Edmond Safra? Was it this investigation or a ‘double-cross’, that triggered Safra’s killing?
At the time of Edmond Safra’s death, he was negotiating the sale of his bank to The Hong Kong & Shanghai Banking Corporation.
Yamashita Gold – Underground gold from Japan
Korea claims that Japan plundered Korea of hundreds of tons of gold from 1937-1944. Philipines, Indonesia have all raised claims against Japan for war time gold loot.
Regardless, one American writer had definitely hit a jackpot – Gold Warriors: America’s Secret Recovery of Yamashita’s Gold (By Sterling Seagrave, Peggy Seagrave). Ian Fleming is supposed to have based his story on the Yamashita chapter of WW2.
Japan’s top underworld crime boss, Taisho (Admiral) Yoshio Kodama, (ranked as an admiral at 34 years) a major figure in the Japanese underworld was in charge of Project “Golden Lilly” – after one of Hirohito’s poems! Objective – looting gangsters in Japanese occupied territories. Supervising the operations was Emperor’s Hirohito’s brother, Prince Chicubi. Management – Japan’s top financial figures.
- Central Bank – Gold Sales
Subsequently, allegedly, a lot of this gold landed with Ferdinand Marcos; the Filipino dictator. Swiss banks, Macao criminals, American generals and politicians – all involved.
Glen Yeadon, writer of “The Nazi Hydra in America: Suppressed History of a Century” writes how Presscott Bush (grand-father of George Bush), Douglas MacArthur were involved in various launderings, diversions and subterfuge involving Nazi gold and Japanese gold after WW2.
After the Japanese surrender, Tomoyuki Yamashita, was tried by a kangaroo court, convicted of vague crimes and hung to death – which added to the rumours of Yamashita’s gold.
Recovery of Boticelli’s Venus
Sandro Botticelli’s Venus Rising, a ‘priceless’ renaissance period painting, now in the Ufizzi gallery, stolen and hidden, was ‘discovered’ by Indian soldiers, during WWII. This ‘discovery’ of Botticelli’s Venus was a highlight of the mopping up operations – and the role of the Indians soldiers has been wiped clean. No book review of a hagiographic account, The Venus Fixers: The Remarkable Story of the Allied Soldiers Who Saved Italy’s Art During World War II By Ilaria Dagnini Brey mentions this contribution by Indian soldiers. I wonder what would have happened if ‘others’ had found this painting. Blame the Nazis for the loot! The painting would never have been recovered, I presume!
Central Bank Gold Sales
Between 1999-2009, European Central Banks have sold more than 4000 tons of gold under the Central Bank Gold Agreement (CBGA).
Switzerland, which had held the most gold reserves per capita in Europe in 1999, has sold more than 1,300 tons of its gold reserves. Other major sellers in the past 10 years included France, the Netherlands, and the U.K.
Countries like France, where monetary policy is now set by the European Central Bank, still maintains its own central bank. The U.S. hasn’t sold gold.
In the past, abrupt selling has sometimes depressed gold prices. The Bank of England’s announcement in early 1999 that it was selling part of its reserves helped gold prices slump to a 20-year low. Gold traded at just above $250 an ounce by the summer of that year.
But efforts to coordinate those sales have reduced those shocks. On Sept. 26, 1999, 15 European central banks, led by the ECB, signed the first CBGA to take concerted moves on gold sales.
The banks agreed that in a five-year period, they will cap their total gold sales at around 400 tons a year, with sales in five years not exceeding 2,000 tons. The CBGA was renewed in 2004 for another five-year period. The second CBGA raised annual ceiling to 500 tons and the five-year limit to 2,500 tons.
The interesting bit was where did the European Central Banks get so much gold from! Was it the various gold hoards, that had disappeared from 1900-200o, making a re-appearance!
For long, these calls for accountability from ‘conspiracy theorists’ have been ignored. The good news. These ‘conspiracy theorists’ have not been able to locate any more of such extra sources of gold, which may disturb the market in the next few years.
Gold and currencies outlook
Gold /Silver /Oil and the BSE-Sensex Co-relation - How will this pan out?
Gold scenario for this year
With gold prices at a historic high, the future trend of gold price is the question on everybody’s mind. There are a few wrinkles which make the future of gold price a complex subject. Gold prices in the coming 1-3 years, may not be a open-and-shut case. Lending stability to gold prices are the following six factors.
- IMF gold sales – IMF has some 3000 tons of gold – of which, some 400 tons have been earmarked for sale. 200 tons has been bought by RBI and another 20 tons by sundry central banks of Sri Lanka, Mauritius, etc. Leaving less than 200 tons on the table. RBI claims that they have put in a bid for the rest also – and the decision on that will be taken soon. Thus, any downward pressure on gold prices due to IMF sale is unlikely.
- Central Bank gold sales – Various European banks have been selling gold from their ‘reserves’ on the open market, over the last ten years. Not much is left from that quota. No downward pressure from this quarter also.
- Chinese Yuan appreciation – The whisper on the street is that the Chinese yuan may see 10%-15% appreciation in the next 4-8 months. This may trigger a re-balancing of the global currency equations, making the dollar weaker in narrow range. This may lead to a welcome lowering of the US trade deficit – which will strengthen the dollar, against non-yuan currency. And re-create some confidence in the US dollar.
- Indian business outlook – Yuan appreciation will end up making the Indian export sector, specifically and corporate sector generally, more profitable. An increase in merchandise export seems unlikely. Improvement in profitability will attract dollar inflows into India for investment in Indian stock markets; increasing liquidity in India, decreasing interest rates and mildly strengthening the rupee.
- Double whammy – A strengthening rupee and a stronger dollar is likely to further put downward pressure on gold prices. For the first time in many years, India has slipped to number two position (by a minor ten tons) as the largest gold ‘consumer.’ Accompanied by the drumbeat of official media, Chinese consumers have been encouraged to buy gold – and comparisons to India are being freely made.
- Gold value is 10% of Indian capital stock – Keep in mind that India is a US$1 trillion economy and India’s 25,000 tons of private gold reserves @Rs.18,000 per tola and Rs./USS$ rate @Rs.45 to dollar converts to US$ 1 trillion also. Adopting a return on capital employed @ 10%, implies total capitalization of the Indian population at US$10 trillion. And gold forms 10% of that capital. Is this an equilibrium in India. From here on, Indian gold demand may well be damped.
“Even if it’s sold at a market price, we should still buy,” counters Xia Bin, head of a key Beijing think tank advising the State Council cabinet (and also making plain that this is his personal view).
“India’s okay with it, why shouldn’t we be? What’s the use for so many dollars, whose purchasing power is weakening anyway? With so many foreign reserves in hand, I think China should buy, without doubt.”
- What about the Eagle’s loot?
One tremor is all
What can trigger a fresh upward burst in gold prices, can be any of the following events.
One tremor, in the market, on any of these triggers, will set off another stampede towards gold.
Depending on the event, the next breather gold may then take will possibly be at US$1800 (ounce)/ INR25,000 (tola).
As the last one year unfolded, the Citi, GM, rescue plans, have strained the US Treasury. The next upheaval may be sovereign debt.
How can Greece, Spain or the UK unravel the EU
Greece, Iceland, Ireland, Spain, UK et al are tethering at the brink. If they regain their balance, world economic outlook may give reasons for optimism – and for gold prices to take a breather. To avoid a default by Greece, Spain or UK, the ECB may need to extend some really big sums of money.
What makes these five cases specially worrisome, is the near-absence of manufacturing and industrial output in these countries. Unlike France, Germany or Italy. This may make EU-member countries balk at extending lines of credit, sovereign guarantees, underwriting of new loans, interest /capital waivers, rescheduling of debts, rollovers – the works.
Defaults by any or all names. Without credit lines, loans, underwriting, guarantees to these on-the-edge countries, may set off an exodus or a break-up of the EU.
Can Russia and China become a problem?
Russia has seen a major drop in export income, due to crash in oil and raw material prices. Yuan appreciation in the China could the other trigger. But these two scenarios may take 2-5 years to play out. These may not be the reasons for the immediate run-up on gold prices.
But to get a real perspective on how changes in gold prices can happen, the Soviet Gold saga is worth looking at.
“Even if it’s sold at a market price, we should still buy,” counters Xia Bin, head of a key Beijing think tank advising the State Council cabinet (and also making plain that this is his personal view).
“India’s okay with it, why shouldn’t we be? What’s the use for so many dollars, whose purchasing power is weakening anyway? With so many foreign reserves in hand, I think China should buy, without doubt.”
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