Gold's Regular Morning Mugging
Not everyone is a morning person. And few people like Mondays.
But if you're a precious metals investor, mornings – especially Mondays – are brutal.
The precious metals are routinely sold off at or soon after the 8:20am EST morning open of the New York NYMEX exchange.
Below are the daily gold price charts (source: Kitco) for each Monday (or Tuesday, if Monday was a holiday) since early this year. The current day's gold price is noted by the bright green line. The morning takedown is highlighted by the orange oval.
Monday, January 7
Gold is taken down $10 immediately after the 8am NYMEX open
Monday, January 14
A late breaking rally begun on the London exchange is quickly contained at the NYMEX open, and then beaten down nearly $10. Notice that the previous Friday's gold price action (the bright blue line) also showed the same behavior at the same time, but with an even more severe response once the NYMEX opened.
Monday, January 21
The 8am sell-off is smaller here (only a few $), but still noticeable.
Monday, January 28
Again, a sell-off happens after the 8am open. Note again how the previous Friday's action was similar, but even more severe.
Monday, February 4
Finally, an outlier. While there was an initial dip in the first hour of the NYMEX, the price took off soon after. So let's not count this one.
Monday, February 11
An immediate $14 drop at the 8am open. The downward momentum started in London, but the vertical downdraft once the NYMEX opened is unmistakable.
Tuesday, February 19
While less sharp, the steady selling clearly begins at 8am, beating gold down $12 to the technically significant $1,600 threshold.
Volume & Timing
Running the above data by Chris, he noted two additional observations.
The first is that the price suppression is commencing increasingly in advance of the start of the NYMEX's open outcry process at 8:20am EST (i.e., how trading happens at the NYMEX). This suggests that it's being done on behalf of powerful players granted permission to circumvent the rules.
The second is that the volume levels in this pre-open trading is similar to that seen during active hours. That is very unusual in markets, and exceptionally high.
For those wondering, the daily price charts for silver indicate measurably similar action during these gold takedowns. Not in exact lockstep, but directionally similar both in degree and timing.
[Update: after initially writing this, I noticed Zero Hedge posted a related analysis today of the takedowns in silver for the month of February so far. Like gold, the selling is concentrated in the first few hours of the day on the NYMEX]
...they appear to be strangely collected in a brief four hour window at the start of the day... the black line is the average of the day's performance in February across the dates selected.
It's hard to swallow that these charts are evidence of a free and efficient market. Otherwise, a pattern this predictable would be quickly removed as traders and HFT algos piled in to a "sure" bet.
Instead, this is behavior one would expect to see if powerful interests wanted to suppress the price of gold: hit the price hard and early at the start of the trading week to prevent the price from building upward momentum, as well as to make capital think twice before entering the gold market.
Who is doing this selling at the market open? Is it TBTF ("too big to fail") banks making profit on large short positions? Is it the Fed, through proxies, keeping the gold price contained so as not to signal how badly QE is devaluing the dollar? Allegations swarm across the Internet that it's one of these – or both. But we don't know for certain. The exchanges don't make that information available to the public.
But while these charts above are not enough evidence to prove that the gold price is being manipulated, they sure exhibit the symptoms one would expect to see if it is.
So, the big question is: if the precious metals market is being manipulated, is it wise to be in it?
History is littered with the bodies of investors whose investment thesis was right, but whose timing was wrong. Even though precious metals investors may be correct in their fundamental rationale for buying gold, can the precious metals markets remain held in check (or driven further down) for long enough that it's not worth the risk of owning the metals at all right now?
As I laid out in Time To Choose, investors are facing a junction where they need to make a decision. Since rising markets and fiscal policy have divorced themselves from fundamentals, the gap between "what is" and "what should be" is widening. The weighting of your capital allocation needs to be based on which side you see winning out here.
From our perspective here at Peak Prosperity, for all of the reasons explored in the Crash Course and discussed here daily, we firmly believe that fundamentals will ultimately matter most. And when they fully express themselves, there will be a tremendous re-pricing of assets – largely higher for tangible assets that require energy to obtain, and markedly lower for paper claims on wealth (stocks, bonds, and their derivatives).
But as we've often said, the corrective process may very well take much longer than we ever expected to arrive. Frankly, we're amazed that the system has held together so well over the past 5 years with all of the thin-air money printing, trillion-dollar deficits, and $100 oil. If you are playing to the fundamentals, as we are, you need to be eyes-wide-open that you may be frustrated for far longer than you'd like to be.
So, if you decide to bet on the continued success of the status quo, your choices are easy: Get in the paper markets and go long. The Fed will be adding $85 billion of liquidity rocket fuel each month for the rest of the year to push the prices of your paper investments even higher.
But if you choose the fundamentals, here are a few important guidelines to keep in mind:
- Build your core position in allocated (or better, personally held) physical bullion. It will never go to $0, you've removed or minimized counter-party risk, it can't be rehypothecated, and is often the most anonymous way to acquire PMs.
- If you invest in "paper" gold, do it with money you can afford to lose. Risks of all sorts (price manipulation, counter-party risks, market shortages, rule changes, trackability, etc.) are all much higher. Read the prospectuses carefully, and make sure to only invest in those funds that fully back their shares with bullion (vs. futures contracts).
- Don't use leverage. Don't let your enthusiasm make you vulnerable. Many leveraged ETFs lose money over time due to transaction costs even if the metals rise. And when the markets stay flat for prolonged times – or worse, go down – they can be widowmakers.
A Time to 'Hold Fast'
It's only human to have your confidence shaken when the market acts so completely differently than you think it should for so prolonged a time. Chris and I feel the same pain, both constitutionally as well as in our wallets, as much of our net worth is invested in the PMs.
But every time we go through the exercise of challenging our assumptions, we walk away feeling certain that our charted course is the correct one – and that at some point, fundamentals will prevail.
As for what those fundamentals are, there's a seminal piece Chris wrote back in 2011 called The Screaming Fundamentals for Owning Gold and Silver that is even more true today. I highly recommend revisiting it.
Chris has mentioned many times that this market feels an awful lot like 2007, when asset prices powered ever higher month after month, even though the underlying data was deteriorating fast. As then, he sees a high and rising potential for a violent correction that will take the market by surprise and vaporize a lot of wealth before players are able to react.
It's times like these when you need to have the courage of your convictions and hold fast to whatever course of action you have decided upon after careful, considered analysis. During these trying periods, it's helpful to converse with a community of like-minded thinkers who can help remind you of the facts underlying your rationale – which is why I recommend joining PeakProsperity.com's Gold & Silver Group if you own PMs. It's a great source of both informational and emotional support.
Chris and I will continue to closely track the developments in the precious metals markets and report back on any material changes to our outlook as they develop. In the meantime, we'll be holding fast. We hope you'll be doing the same, too.
(click on image if in need of dramatic inspiration)