Gold unfazed by large sales

On the basis of news developments over the past month, I now forecast about a 67 percent likelihood that the spot price of gold will top $1,450 and silver will surpass $20 by Labor Day this year.

Since gold and silver prices peaked in 2011, making price forecasts has been treacherous. Despite physical supply and demand factors mostly indicating stable or rising markets, prices generally slid until near the end of 2015. Just about every prognosticator out there, including me, were off multiple times. Prices seemed to be so irrational that it was safe to simply stop making forecasts.

Prices are up significantly over the past few months. For me to now make any price prediction and give a high prospect of even more near-term increases is an indication of my relative confidence at what I see going on in precious metals markets.

Here are some of the reasons why I have decided to stick my neck out.
The Federal Reserve Board of Governors held three days of sudden, secret, emergency meetings April 11-13. After the first day’s session, Federal Reserve Chair Janet Yellen went to the White House for an unprecedented direct secret meeting with President Barack Obama and Vice President Joseph Biden. Afterward, all participants tried to pretend that no substantive issues were discussed and no important decisions were made.

These meetings were announced as Deutsche Bank agreed to settle its part of class action lawsuits by admitting that it conspired to manipulate the silver and gold price fixes in the London market. This development is especially significant as it is Germany’s largest bank. Deutsche Bank is in serious financial difficulties, holding massive troubled debts on its books at full face value. The bank also holds the largest portfolio of derivatives contracts of any financial institution in the world, which could trigger a domino chain of defaults should the bank become insolvent.

I very much doubt that the timing of these emergency meetings right after Deutsche Bank’s problems became public was a pure coincidence. In the circumstances, I don’t believe that these meetings covered only everyday matters. As I wrote right after the meetings, I expected there was some kind of lurking financial catastrophe about to explode.

Events over the past few weeks indicate that my suspicions are likely accurate – especially those that took place last week.

It has been a consistent pattern for the past several years that the price of gold on the New York COMEX markets is almost never allowed to rise more than 1 percent from the previous day’s close. On the few times that it has, it almost never rises more than 2 percent. Should gold in COMEX trading approach a 1 percent and 2 percent advance over the previous close, there appears to be computer-triggered contracts that are sold short in order to bring prices back down.

Last Friday, the Non-Farm Payrolls report was released at 8:30 a.m. Eastern Time. The headline report of +160,000 jobs from the prior monthly report was the lowest increase in seven months. Beyond that, there were 19,000 jobs subtracted to adjust the prior two months reports.

Even more extreme, the increase included 233,000 jobs double counted because of the “birth/death adjustment.” The birth/death adjustment assumes that more jobs exist than were actually counted because the U.S. population is growing. Even statisticians at the Bureau of Labor Statistics acknowledge that this adjustment is invalid. Each February for the January report, the birth/death adjustment for the prior year is pretty much reversed outside of what is reported for the monthly jobs changes (and sometimes also in July for the June report).

The headline jobs figure was a disappointment compared to a consensus expectation of +200,000. The corrected number was even worse than stated in the headline. If you subtract the 19,000 prior adjustments and the 233,000 from the birth/death adjustment, the “seasonally adjusted” jobs change from the prior month was a decline of 92,000. In fact, the “seasonally adjusted” household data in Table A of the BLS reports show a decline of 316,000 jobs from the prior month.

However you look at last Friday’s jobs report, it was at least a disappointment and possibly a disaster. Within one minute of its release, the gold spot price was up about $10 and U.S. stock markets were tumbling. That $10 increase, as it happened, resulted in the price of gold hitting a 2 percent increase from the previous COMEX close. Sure enough, another flood of short-selling of paper gold contracts hit the COMEX. In two minutes, from 8:31 to 8:33, more than 1,700,000 ounces of gold were sold on the COMEX, roughly 2 percent of annual newly mined gold production.

Three more times last Friday, the price of gold on the COMEX rose to exactly +2 percent from the prior close. Each time, a new flood of selling hit the exchange to push the price back down.

From the close on Thursday, April 28, through Friday, May 6, a total of about 10 million ounces of gold contracts were sold short on the COMEX. In only six trading days, the amount of gold contracts sold on this exchange equaled about 13 percent of annual worldwide mining output. The quantity of open gold contracts on the COMEX reached almost to an all-time high record on May 6.

So, how much impact did selling 10 million ounces of gold contracts have on the price of gold? From the COMEX close on Friday, April 29, to Friday, May 6, the decline was only $2!

In years past, such an extreme quantity of gold sold in such a concentrated time would have knocked down the price at least 10 percent and kept it down for months.

Two weeks ago, the quantity of open silver contracts on the COMEX exceeded one billion ounces for the first time ever. Open contracts stayed close to that record level through the end of last week. On Monday last week, the price of silver briefly topped $18 during COMEX trading hours. Ever since, its price has been restrained.

For both gold and silver, the evidence of massive efforts to depress their prices in the New York COMEX markets makes it surprising that little success has been achieved. After the COMEX closed Monday this week, gold fell to about $1,260 and silver went below $17, levels they were at in late April. This is nowhere near to retracing 50 percent of the 2016 year-to-date gains that are often seen in market corrections.

By the way, investors took last Friday’s jobs report as terrible news. In response, the White House quickly declared a presidential press conference. President Obama, on such short notice, performed poorly. Still, he did the best he could to try to deflect media attention away from the jobs report to other matters.

That such massive short-selling of paper contracts on the COMEX had a much smaller impact on prices compared to what happened in years past is a significant sign to me that prices are likely to rise over the summer. That does not mean that prices may not decline a bit further from where they dipped early this week.

Remember, I am only giving a rise to $1,450 gold and $20 silver a two-thirds probability. I am hedging my prediction because of possible behind-the-scenes maneuvers by politicians and bureaucrats during this election year. People in government who want to keep their jobs don’t want a poor economic track record in the months before the elections. Therefore, expect continued ever more desperate attempts to hold down precious metals prices. But, with the market action I have seen over the past month, I am predicting that such tactics are more likely than not to fail.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

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