“Stocks rose, paring the biggest weekly drop in 10 months, as the Group of 20 nations concludes talks aimed at bolstering the global economy. The yen weakened, gold climbed above $1,400 an ounce and oil advanced.

The MSCI All-Country World Index added 0.3 percent at 6:55 a.m. in New York, paring this week’s loss to 2.6 percent. Standard & Poor’s 500 Index futures gained 0.7 percent. The Shanghai Composite Index jumped 2.1 percent. Japan’s currency tumbled at least 1 percent against all 16 major peers. The 10- year Treasury yield climbed two basis points to 1.71 percent. Gold rose 1.6 percent and Brent traded above $100 a barrel.

Japanese Finance Minister Taro Aso said yesterday that his nation’s policies went unopposed at the G-20 meeting inWashington, signaling further weakening of the yen as the central bank pushes ahead with stimulus measures. A Chinese government economist said growth will rebound. McDonald’s Corp. and Honeywell International Inc. are among companies due to release results before the start of New York trading today.

“After the declines we have seen, it’s to be expected that you will see a bit of a marginal bounce,” Brenda Kelly, market strategist at IG, told Mark Barton in an interview in London on Bloomberg Television.

The Stoxx Europe 600 Index climbed 1 percent for the first advance in six days. The gauge has still fallen 2 percent this week, the biggest drop this year….”

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“Those who cannot remember the past are condemned to repeat it. – Santayana

The question of whether to commit new funds to stocks here is nuanced and complex, not least because it isn’t obvious that traditional alternatives – bonds or cash – offer any better value. We are very near all-time low interest rates across most developed government bond markets, credit spreads are near all-time tights, and rates are negative out to 5 or more years in real terms. If these options are representative of the complete opportunity set, then one might be justified in apportioning some capital to equities, if only because it is difficult to identify which investment stinks most profoundly.

However, those who do choose to allocate to equities should be aware of where we are relative to other bull-bear cycles throughout history. We have rambled-on about the poor prospects for equity returns over the next 10 – 20 years in many prior articles (see here for a full analysis, and here for a summary of research from other respected firms), but the true authority on stock market valuation is John Hussman. We would strongly encourage readers to investigate Dr. Hussman’s Weekly Market Comments for all the gory details.

This article approaches the issue from a completely new direction than our other work and the work of Dr. Hussman. It is mostly constructed as a thought experiment that explores the logic of compounding, but the conclusion is troubling for those currently overweight U.S. equities.

For the purpose of the study below, we examined the S&P 500 price series fromShiller’s publicly available database to understand the duration and magnitude of all bull and bear market periods in U.S. stocks since 1871. We defined a bear market as a drop in prices of at least 20% from any peak, and which lasted at least 3 months. Bull markets were then defined as a rise of at least 50% from the bottom of a bear market, over a period lasting at least 6 months.

Chart 1 and Table 1 describe every bull market since 1871 in the S&P, including duration and magnitude information. The lesson from this analysis is uninspiring for equity bulls, as we will see. The core hurdle is that the current bull market has (through end of February) already delivered 105% of gains, against the median 124% bull market run through history (using monthly data). Of course, this means that, should this bull market deliver an average surge, investors can hope for less than 20% more growth from this cycle. Further, given that the median bull market has historically lasted 50 months, and we are currently in our 49th bull month, we are about due for a wipeout.

Chart 1. Bull Markets since 1871

Source: Shiller (2013)

Table 1. Bull Markets since 1871 – Statistics

Source: Shiller (2013)

It’s troubling enough that the current bull market has already delivered 85% of the gains, and lasted about as long, as the median historical bull market. More disconcerting still is the fact that, when the bear market comes, as Chart 2. and Table 2. demonstrate, it is likely to wipe out 38% of all prior gains. And this has profound mathematical implications for current equity investors.

Chart 2. Bear Markets since 1871

Source: Shiller (2013)

Table 2. Bear Markets since 1871 – Statistics

Source: Shiller (2013)

Portfolio growth is governed by the mathematics of compounding, which means that, for example, a 100% gain is erased by a 50% loss, and a 50% loss requires a 100% gain to get back to even. Applying the same principles to where we are in the current bull/bear cycle is illuminating.

If we assume that the next bear market will deliver losses in-line with what we have experienced from bear markets through history, then….”

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“Federal Reserve Bank of Richmond President Jeffrey Lacker said he favors slowing bond buying now to ensure record growth in the central bank’s balance sheet doesn’t impede the eventual withdrawal of record accommodation.

“I’m in the camp we have to taper and stop right now if it were up to me,” Lacker told CNBC. “If you made me dictator, that’s what I would do. I wouldn’t have gone down this asset purchase path,” he said.

The Fed is buying $85 billion of Treasurys and mortgage-backed securities each month.

“The deeper we go with asset purchases, the trickier we are going to make the exit process,” he said. “That to me is the largest cost.”

He also said that expectations for future U.S. inflation remained well-anchored, despite massive Fed policy easing that he had personally opposed.

“I have been impressed by the stability of inflation expectations. People are pretty confident we’re not going to let it get away from 2 percent. I like that,” Lacker said. “I think we’re in a good place now, but I think we shouldn’t be complacent,” he said…..”

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[youtube://http://www.youtube.com/watch?v=BfK3_kJ4z7k 450 300]

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” “Germany’s top central banker warned that the European debt crisis could take a decade to overcome, apparently contradicting claims from other top European officials that the worst has passed.

He also predicted that the European Central Bank (ECB) might cut interest rates depending on future economic developments.

“Overcoming the crisis and its effects will remain a challenge over the next decade,” Bundesbank President Jens Weidmann told The Wall Street Journal.”The calm that we are currently seeing might be treacherous” if reforms are delayed, he said.

“Everyone is asking what more can the central bank do instead of asking what other policymakers can contribute,” Weidmann noted, adding that the central bank could cut interest rates if new information warranted such a move.

“We might adjust in response to new information,” however, “I don’t think that the monetary-policy stance is the key issue.” The ECB cut its key interest rate to a recod low  0.75 percent in July.

European Commission President Jose Manuel Barroso last week claimed that the worst of Europe’s crisis has passed. “I believe that the EU has come through the worst of the crisis but the situation is still fragile,” he told reporters during a visit to Prague, according to various newswire reports.

Meanwhile, Weidmann said that “a point that I think is important to make — perhaps less for my central bank colleagues than for finance ministers — is that the medication monetary policymakers administer only cures the symptoms and that it comes with side effects and risks.”

The International Monetary Fund (IMF) warned Wednesday that eurozone companies face a massive “debt overhang” that could extend the downturn and possibly spark a more serious crisis, The Washington Post reported….”
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“A scary head-and-shoulders pattern could be building in the S&P 500, and this negative chart formation would be created if the market stalls just above current levels.

“It’s developing and it’s developing fast,” said Scott Redler of T3Live.com on Wednesday morning.

Redler follows the short-term technicals of the market, and he says the head and shoulders should be proven either way in the next few trading days. “Anticipating this type of pattern has been painful this year,” he said. The head and shoulders is seen by technicians as a signal of more selling to come.

“The bears are hanging their hat on the idea that this bounce back will lead to a lower high, potentially a right shoulder that continues in the 1575 area,” said Redler, describing the pattern after Tuesday’s close. “The first pullback of the year was March 20 with the Italian election. The left shoulder was built during the month of March, with the peak being around 1573. Then you had a head when it hit its high at 1597.”

 

CNBC

 

 

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“Volatility’s prolonged absence from the stock market appears to be coming to an abrupt end.

After being largely invisible for the past nine months – coinciding with a sharp equity rally – several signs indicate that instability is coming back.

Call options buying recently hit a three-year high for the CBOE’s Volatility Index, a popular measure of market fear that usually moves in the opposite direction of the Standard & Poor’s 500 stock index.

(Read More: Scary Pattern Could Be Forming on S&P 500 Chart)

A call buy, which gives the owner the option to purchase the security at a certain price, implies a belief that the VIX is likely to go higher, which usually is an ominous sign for stocks.

“We saw a huge spike in call buying on the VIX, the most in a while,” said Ryan Detrick, senior analyst at Schaeffer’s Investment Research. “That’s not what you want to hear (because it usually happens) right before a big pullback.”

The last time call options activity hit this level, on Jan. 13, 2010, it preceded a 9 percent stock market drop that happened over just four weeks, triggered in large part by worries over the ongoing European debt crisis.

“That obviously has been the smart money in the past,” Detrick said. “We’re not ignorant to the fact that this could be the same thing. The fears out of Europe for whatever reason spring up in the springtime.”…”

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“The falling yen coupled with a fall-off in Chinese investment inflows “increasingly resembles” the run-up to the 1997 currency crisis, said Albert Edwards, Societe Generale’s ultra-bearish strategist.

“It seems investors may have forgotten thatyen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia’s subsequent economic collapse,” Edwards wrote in a global strategy note on Wednesday.

Edwards, who recently returned from meeting clients in Hong Kong and Singapore, forecast the Bank of Japan will lose control of its recently launched program of aggressive monetary easing, leading to spiraling inflation and an increasingly unsustainable debt position.

“If the market really believes the Bank of Japan is committed to the 2 percent inflation target (and I certainly do), then Japanese bond yields will quickly attempt a move above 2 percent,” he said.

“If the Japanese government bond yield begins to rise, then an unsustainable debt position becomes even more obviously unsustainable and the government will be obliged to ramp up its quantitative easing operations to pin yields at low levels.”

“I certainly expect accelerating quantitative easing to undermine the yen further, and the market to anticipate this,” he added.

Edwards warned investors they should expect money to pour out of Japan in the same way it did after the BoJ’s foreign exchange intervention in 2004.

“Who will be a beneficiary of this carry trade? Probably high yield GIIPS [Greece, Italy, Ireland, Portugal and Spain] bond yields and the euro. And hence the periphery will appear to have been ‘fixed’. Who will suffer? Germany, as the euro soars,” he said….”

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“The imperial tree falls not because the challenges are too great but because the core of the tree has been weakened by the gradual loss of surplus, purpose, institutional effectiveness, intellectual vigor and productive investment.

Comparing the American Empire with the Roman Empire in its terminal decline is a popular intellectual parlor game. The comparison is inexact on a number of fronts, starting with the nature of empire: Rome ruled a territorial empire, while the U.S. is a hegemony that doesn’t need to hold territory (other than key overseas military bases); its dominance is based on the global projection of hard and soft power, diplomacy, finance and the monetary regime of the reserve currency.

Despite the apparent difference, the two empires share the key characteristic of all enduring empires: they extract the cost of maintaining the empire from client states and/or allies.

The mechanisms differ, but the results are the same: the empire’s cost is distributed to those who benefit from its secure trade routes.

Two of the key characteristics of an empire in terminal decline are complacency and intellectual sclerosis, what I have termed a failure of imagination.

Michael Grant described these causes of decline in his excellent account The Fall of the Roman Empire, a short book I have been recommending since 2009:

 

There was no room at all, in these ways of thinking, for the novel, apocalyptic situation which had now arisen, a situation which needed solutions as radical as itself. (The Status Quo) attitude is a complacent acceptance of things as they are, without a single new idea.This acceptance was accompanied by greatly excessive optimism about the present and future. Even when the end was only sixty years away, and the Empire was already crumbling fast, Rutilius continued to address the spirit of Rome with the same supreme assurance.

This blind adherence to the ideas of the past ranks high among the principal causes of the downfall of Rome. If you were sufficiently lulled by these traditional fictions, there was no call to take any practical first-aid measures at all.

In other words, if our idea of intellectual rigor and honesty is Paul Krugman dancing around the Neo-Keynesian Cargo Cult campfire waving dead chickens and mumbling nonsensical claims of grand success, we are well and truly doomed.

The chapter titles of the book give a precis of the other causes Grant identifies:

The Gulfs Between the Classes

The Credibility Gap

The Partnerships That Failed

The Groups That Opted Out

The Undermining of Effort

I recently read a lengthier book by Adrian Goldsworthy titled How Rome Fell: Death of a Superpower.

In Goldsworthy’s view, a key driver of decline was the constant political struggle for power drained resources away from protecting the Imperial borders from barbarian incursions and addressing the long-term problems facing the Empire.

Such conflicts for the Imperial throne often led to outright civil war, with factions of the Roman army meeting on the field of battle.

In other words, Rome didn’t fall so much as erode away, its many strengths squandered on in-fighting, mismanagement and personal aggrandizement/corruption.

More telling for the present is Goldsworthy’s identification of expansive, sclerotic bureaucracies that lost sight of their purpose. The top leadership abandoned the pursuit of the common good for personal gain, wealth and power. This rot at the top soon spread down the chain of command to infect and corrupt the entire institutional culture.

As the empire shrank and lost tax revenues, the Imperial bureaucracies continued growing, much as parasites attach themselves to a weakened host.

Individual contributions and institutional success are both difficult to measure in large bureaucracies, and it is tempting to define success by easily achieved metrics that reflect positively on individual contributions and the institutional management.

As the organization loses focus on its original purpose, the core purpose of the institution is given lip service but is replaced with facsimiles of managerial effectiveness, bureaucratic infighting over resources and the targeting of easily gamed metrics as substitutes for actual success.

People who have no skin in the game behave quite differently from those who face consequences. This disconnection of risk from consequence is called moral hazard.

Bureaucracies tend to institutionalize moral hazard: those managing the institution’s departments rarely suffer any personal consequence when the institution fails to perform its function. Funds are placed at risk, but the individuals making the bets with the institution’s money suffer no losses should their policies result in failure.

By breaking the institutional purpose into small pieces whose success is measured by easily gamed targets, the institution can be failing its primary function even as every department reports continued success in meeting its goals. Repeated failure and loss of focus erode the institution even as those in charge advance up the administrative ladder.

In the final years of the Empire, in the 5th century A.D., this institutional failure led to the absurdity of detailed descriptions of army units being distributed within the Imperial bureaucracy, while the actual units themselves–the troops, the officers and the equipment–had ceased to exist. In some cases, it appears bureaucrats and officers collected pay for supplying and commanding completely phantom legions.

The disconnect between the failure to fulfill the institution’s original function and the leadership’s rise feeds cynicism in the institution’s employees and erodes their purpose and initiative. Soon the institutional culture is one of self-aggrandizement, gaming of departmental targets, protection of budgets and a collapse of the work ethic to the minimum level needed to avoid dismissal. Personal responsibility for institutional failure is lost.

Does this describe the vast state fiefdoms and state-protected cartels of America’s military-industrial complex, sickcare and the education industry? I think the answer is self-evident: yes. While there are still hard-working, competent people within these sprawling empires of moral hazard, these few are not enough to wring long-term success from negligence, friction and incompetence. All they can do is stave off implosion for a time….”

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“The stock market, which hit record peaks earlier in April, will end the year higher, says Larry Fink, CEO of BlackRock, the world’s biggest money manager.

Positive fundamentals will dictate the move, he tells CNBC. About 85 percent of the companies that have reported first-quarter earnings have topped analysts’ estimates, he says.

“It’s an indication of a stronger economy. It’s an indication of corporations managing their expenses properly. It does validate my long-term view.”

BlackRock enjoyed a record inflow of $33.7 billion into its stock funds during the first quarter. “What we’ve seen from the beginning of the year is that clients are putting cash to work,” Fink explains.

“Most of that money came from cash. We didn’t see a rotation from bonds to equities. We saw a persistent demand for equities.” And Fink thinks that demand will continue….”

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“Investors are dumping gold funds at the fastest pace in two years in favor of equities, compounding a slump that has wiped $560 billion from the value of central bank reserves.

Exchange-traded products linked to gold dropped $37.2 billion in 2013 as the metal reached a two-year low Tuesday. Gold funds suffered net outflows of $11.2 billion this year through April 10, the most since 2011, while global and U.S. equity funds had net inflows of $21.25 billion, according to Cambridge, Massachusetts-based EPFR Global.

Central banks are among the biggest losers because they own 31,694.8 metric tons, or 19 percent of all the gold mined, according to the World Gold Council in London. After rallying for 12 straight years, the metal has tumbled 29 percent from its September 2011 record of $1,923.70 an ounce. Growing economies and corporate profits, along with slowing inflation, boosted global equities by $2.28 trillion this year at the expense of the traditional store of value, according to data compiled by Bloomberg.

“There’s a perception that risk has been lessened, and with that, investors are looking for assets that either generate income or have growth potential, neither of which gold has,” Anthony Valeri, a market strategist with LPL Financial Corp. in San Diego, which oversees $350 billion. “We’ve seen a grab for yield, and without a yield, gold has been left out.”

Bear Market…”

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“The Federal Reserve and the world’s other central banks — not fundamentals — are boosting asset prices, says Mohamed El-Erian, CEO of giant money manager Pimco.

“Investors should recognize that in virtually every single market segment, we are trading at very artificial levels,” El-Erian told WSJ.com. “It’s true for bonds, it’s true for equities. . . . If these levels aren’t validated by the fundamentals, then investors will get hurt.”

In the United States, the stock market hit record highs again last week, and bond yields are near record lows.

The Fed has added more than $2 trillion to its balance sheet through quantitative easing (QE) over the past five years. And it plans to keep the federal funds rate target at zero to 0.25 percent until unemployment shrinks to 6.5 percent from 7.6 percent in March. Other central banks also are in stimulative mode, with the latest entrant the Bank of Japan….”

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“Richard Bernstein’s latest research piece has a view that I very much agree with.  The Fed is traditionally a reactive entity.  When the economy is running hot they tend to lag the market and tighten too late.  When the economy is running cold they show up late to the party as they did in 2008.  On both sides they end up playing catch-up which results in whip-sawing the economy in a way that actually causes more economic volatility than necessary.

Richard Bernstein expects this cycle to end the same way.  He says:

“The Fed believes that reversing QE will slow the economy. However, a steeping yield curve and stronger business confidence argue otherwise. If we are correct, then the Fed could once again be forced to play catch-up to the markets during the mid- and late-cycle.As most cycles mature, the Fed typically realizes that their policies have been too accommodative for the maturity of the cycle. Production bottlenecks and shortages become more frequent, and inflation pressures begin to build. The Fed then rushes to tighten monetary policy in an attempt to make up for the earlier hesitancy to tighten. The traditional end result has been that the Fed’s late-cycle aggressive policies go to far (i.e., they over-tighten policy), the yield curve inverts, and a recession follows.

This cycle seems poised to follow that historical pattern. The Fed remains fearful of tightening too early and has told investors that they will react to the economy’s strength. Their reaction time will probably be slow as well. If our contention that reversing QE might stimulate the economy is correct, then the frequency and magnitude of Fed tightening is likely to accelerate as they realize they’ve created a monster. Their rush to equalize monetary policy with the strength in the economy could lead them to over-tighten and invert the yield curve. A recession would probably follow, and the cycle would end in a very traditional manner.” …”

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“The tumbling gold price has personally cost billionaire hedge fund manager John Paulson at least $1.5 billion so far this year, as a decline in the price of the metal turned into a rout.

The estimated losses for Mr. Paulson, who has made and lost more money on gold than almost any other hedge fund manager, reflect a bold all-in bet on the precious metal

While many investors hold some gold in case of financial calamity or a return of the rampant inflation of the 1970s, since 2009 Mr. Paulson has allowed clients of Paulson & Co to denominate their holdings in gold, rather than US dollars….”

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“The latest jobs report showed that unemployment ticked lower because of a decline in the labor force participation rate.

But many people leaving the workforce are actually quitting their jobs.

David Rosenberg believes this trend puts pressure on companies to raise pay to keep their workforce. This is bad news for profit margins and ultimately stock prices.

Here’s Rosenberg:

“At a time when firings are at record lows and job openings are rising at a double-digit annual rate, the number of people quitting their current job for greener pastures elsewhere is on a discernible uptrend. All this points to higher wage growth ahead, and frankly, this is a good thing for society.

“But the flip side is that as the labor share of the national income pie mean reverts off its all-time lows, we are likely to see profit margins pinched.

“This is the big risk – margin compression affects the ‘E’, while inflation, insofar as the tight historical relationship with final prices holds, even if to a smaller degree this time around, affects the P/E.”…”

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“The recent plunge in gold prices below $1500 an ounce has suddenly awoken, well, just about everyone.  The “gold bugs” are yelling that it is a conspiracy theory by the Fed while the stock market bulls say it is a sign that the Fed has achieved its goal of creating economic growth.  Unfortunately, both arguments, while great for headlines, are wrong.

In August of 2011, during the original debt ceiling debate, gold spiked sharply to just a tad over $1800 an ounce.   In my weekly missive that month I answered the question of “Should I Buy Gold Now?” stating:

“In a one word answer…Are you kidding me – Gold has never been this overbought before and if you ever want to be the poster child of buying at the top – this is it.  Okay, not really a one word answer but here is my point. Gold is currently in what is known as a ‘Parabolic Spike’. These do not end well typically as it represents a ‘panic’ buying spree.  Therefore, if you currently OWN gold I would recommend beginning to take some profits in it.”

At that time i showed four potential levels of retracement.

The advice at that time fell on deaf ears as investors feared that the government was going to default on its debt and the economy was going to plunged back into a deep recession.  Of course, anyone paying attention to the 10-year treasury rate, as it plunged to then record lows, would have understood that a default was not going to be the case.

Of course, the debt ceiling was eventually raised and disaster postponed due to last minute negotiations.  The release of that fear, and subsequent interventions by Central Banks globally, led to a rotation out of the fear trade which began the process of a gold price reversion.

Parabolic spikes in asset prices always lead to price reversions.  Whether it is gold, oil, or the price of Apple stock – excesses to one extreme lead to excesses in the other.  It is often in the final leg of this reversion process that investors “give up” on the previous long held beliefs and throw in the towel.  This action is known as “capitulation” and tends to be a buying opportunity for astute investors at some point.

The chart below shows the long term price of gold relative to the percentage deviation in price from gold’s 34-week moving average…..”

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“Gold’s recent price sag is a minor hiccup in a longer-term rally for the precious metal, according to Peter Schiff, CEO of Euro Pacific Capital.

Schiff contends emerging market governments will drive the price of gold upward as they lessen their dependence on bankrupt developed nations.

Emerging market economies “are conspicuous for very small gold reserves, particularly in comparison to their much larger share of foreign currencies,” he wrote in a commentary on his firm’s website.

“Bankers and political leaders in all of these countries, particularly India and China, have lamented publicly about the very high percentage of U.S. dollars in their reserves, and have even spoken fondly about the reliability and importance of gold.”

Mainstream investors may have ended their brief love affair with gold, creating a brutal season for the metal that is goaded onward by bearish comments from Goldman Sachs, George Soros and other loud voices, Schiff said.

But he noted that nations with the most onerous debt problems also tend to have the highest percentage of gold in their foreign exchange reserves.

Those countries include the United States, with the world’s largest amount of gold in reserve at 8,133 tons and a very high percentage of gold in its foreign reserves at 76 percent, as well as such debtor standouts such as Italy (2,450 tons and 72 percent of reserves), France (2,435 tons and 71 percent), Portugal (382 tons and 90 percent) and Greece (112 tons and 82 percent).

Sooner or later, the debtor nations will need to sell their gold as their sovereign debt crises deepen, Schiff predicted.

And when they do, the emerging new creditor nations, such as India, China, Russia and Indonesia, will buy the gold in order to diversify their own foreign reserves, he said.

“Creditor nations that buy gold cheap from bankrupt nations forced to sell at distressed prices will see the value of their reserves swell, thereby gaining the independence and confidence they need to finally break their reliance on the U.S. dollar as their principal reserve asset,” Schiff wrote….”

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“I am very disappointed by, but not surprised at, the latest transfer of weath to the bankers from everyone else.  The most recent gold bear raid has vastly enriched the bullion bankers, once again, at the expense of everyone trying to protect their wealth from global central bank money printing.

The central plank of Bernanke’s magic recovery plan has been to get everybody back borrowing, spending, and “investing” in stocks, bonds, and other financial assets.  But not equally so – he has been instrumental in distorting the landscape towards risk assets and away from safe harbors.

That’s why a 2- year loan to the US government will only net you 0.22%, a rate that is far below even the official rate of inflation.  In other words, loan the US government $10,000,000 and you will receive just $22,000 per year for your efforts and lose wealth in the process because inflation reduced the value of your $10,000,000 by $130,000 per year.  After the two years is up, you are up $44k but out $260k for net loss of $216,000.

That wealth, or purchasing power, did not just vanish: it was taken by the process of inflation and transferred to someone else.  But to whom did it go?  There’s no easy answer for that, but the basic answer is that it went to those closest to the printing press.  It went to the government itself which spent your $10,000,000 loan the instant you made it, and it went to the financiers that play the leveraged game of money who happen to be closest to the Fed’s printing press.

This explains, almost completely, why the gap between the rich and everyone else is widening so rapidly, and why financiers now populate the top of every Forbes 400 list.  There is no mystery, just a process of wealth transfer of magnificent and historic proportions; one that has been repeated dozens of times throughout history.

This Gold Slam Was By and For the Bullion Banks

A while back I noted to Adam that the gold slams that were first detected back in January were among the weakest I’d ever seen.  Back then I was seeing the usual pattern of late night, thin-market futures dumping which I had seen before in 2008 and 2011, two other periods when precious metals were slammed hard.

The process is simple enough to understand; if you want to move the price down for any asset, your best results will happen in a thin market when there’s not a lot of participation so whatever volume you supply has a chance of wiping out whatever bids are sitting on the books.  It is in those dark hours that the market makers just dump, preferably as fast as possible.

This is exactly what I saw repeatedly leading up to Friday’s epic dump-fest.  The mainstream media (MSM), for its part, fully supports these practices by failing to even note them, and the CFTC has never once commented on the practice, and we all know that central banks support a well contained precious metals (PM) price because they are actively trying to build confidence in their fiat money, and rising PM prices serve to reduce confidence.

Here’s a perfect example of the MSM in action, courtesy of the Financial Times:

Gold tumbles to two-year low

“There is no other way to put gold’s recent sell-off: nasty,” said Joni Teves, precious metals strategist at UBS in London, adding that gold would have to work to “rebuild trust” among investors.

 

Tom Kendall, precious metals analyst at Credit Suisse said “Once again gold investors are being reminded that the metal is not a very effective hedge against broad-based risk-off moves in the commodity markets.”

 

There are two things to note in these snippets.  The first is that the main ideas being promoted about gold are that it is no longer to be trusted, and that somehow the recent move is a result of “risk off” decisions meaning, conversely, that there is increased trust in the larger financial markets that ‘investors’ are rotating towards.  Note that these ideas are exactly the sort of messages that central bankers quite desperately want to have conveyed.

The second observation is even more interesting; namely that the only people quoted work directly for the largest bullion banks in the world.  These are the very same outfits that stood to gain enormously if precious metals dropped in price.  Of course they are thrilled with the recent sell off.  They made billions.

In February Credit Suisse ‘predicted’ the gold market had peaked, SocGen said the end of the gold era was upon us, and recently Goldman Sachs told everyone to short the metal.

While that’s somewhat interesting, you should first know that the largest bullion banks had amassed huge short positions in precious metals byJanuary.

The CFTC rather coyly refers to the bullion banks as simply ‘large traders’ but everyone knows that these are the bullion banks.  What we are seeing in that chart is that out of a range of commodities the precious metals were the most heavily shorted, by far.

So the timeline here is easy to follow – the bullion banks:

1. Amass a huge short position early in the game
2. Begin telling everyone to go short (wink, wink) to get things moving along in the right direction by sowing doubt in the minds of the longs
3. Begin testing the late night markets for depth by initiating mini raids (that also serve to let experienced traders know that there’s an elephant or two in the room)
4. Wait for the right moment and then open the floodgates to dump such an overwhelming amount of paper gold and silver into the market that lower prices are the only possible result.
5. Close their positions for massive gains and then act as if they had made a really precient market call
6. Await their big bonus checks and wash, rinse, repeat at a later date

While I am almost 100% certain that any decent investigation by the CFTC would reveal that market manipulating ‘dumping’ was happening, I am equally certain that no such investigation will occur.  That’s because the point of such a maneuver by the bullion banks is designed to transfer as much wealth from ‘out there’ and towards the center and the CFTC is there to protect the center’s ‘right’ to do exactly that.

This all began on Friday April 12th, and one of the better summaries is provided by Ross Norman of Sharps Pixley, a London Bullion brokerage:

The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract (see below) in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level… the line in the sand.

Two hours later the initial selling, rumored to have been routed through Merrill Lynch’s floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted ‘short sale’, which by driving prices sharply lower in a display of ‘shock & awe’ – would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called ‘stopped-out’ in market parlance – probably hidden the unimpeachable (?) $1540 level.

The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tonne of gold futures selling in total equates to 15% of annual gold mine production – too much for the market to readily absorb, especially with sentiment weak following gold’s non performance in the wake of Japanese QE, a nuclear threat from North Korea and weakening US economic data. The assault to the short side was essentially saying “you are long… and wrong”.

(Source – originally found at ZH)

The areas circled represent the largest ‘dumps’ of paper gold contracts that I have ever seen.  To reiterate Ross’s comments, there is no possible way to explain those except as a concerted effort to drive down the price.

To put this in context, if instead of gold this were corn we were talking about, 128,000,000 tonnes of corn would have been sold during a similar 3 hour window, as that amount represents 15% of the world’s yearly harvest.  And what would have happened to the price?  It would have been driven sharply lower, of course.  That’s the point, such dumping is designed to accomplish lower prices, period, and that’s the very definition of market manipulation…..”

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