The manipulators have a plan for gold. It won’t work

With the four-hour, three-cocktail Christmas lunch season ahead of us, there is very little likelihood of anything dramatic taking place on the stock markets in what’s left of 2014. The anti-Putin drive + demand slump will continue to knock oil back, and no central banker of import anywhere in the world (or its government) has the slightest desire to raise interest rates…for the time being. Nor do I think there’ll be (just yet) any major calamity in the EU. Indeed, it tells you a lot about the 21st century economic model that, when those fiddling with it are distracted by client entertainment, families and the harleydaze, nothing much is likely to go wrong.

I spent some of the last 24 hours looking at banking firm, institutional and economic journalists’ ideas of what the stock market might do in 2015. I’m in cash at the moment so it doesn’t concern me personally, but as a guide to what you might call global systemic management – aka manipulation and fraud – it’s a useful exercise.

For me, it’s chiefly useful because what people ‘expect’ often reflects a degree of wish fulfilment. In that sense, it’s fascinating to note that the general view among central and private banking is that things like the S&P and the FTSE might grow in the 1-3% range, but nothing more. There’s a not entirely subconscious desire here for stability.

It’s a counter-intuitive feeling really, because with stocks so ludicrously overvalued everywhere, and QE being tapered in the States, it would seem only a matter of time before a Black Thursday wipes 20% off their value…either followed or not by a jump off the cliff. But as always, for the ‘ordinary investor’ (a rare species in these days of SOL trades, deep liquidity pools and hidden directionalising) looking to be somewhere other than the bourses, all the exits have been closed off. The top-end glitz bricks of the property sector have been gazumped to new hypes, sovereign debt bonds are in negative territory, commodities are responding to the world slump, gold is…..well, gold is suspect, and deposits in banks are not only Zirped but downright unsafe as long as the brass necks are bandying words like ‘bailin’ around.

Gold as a tracked safe-haven is of course ridiculously undervalued (if you accept my version of what lies ahead) but is being manipulated down in price by various means for the following reasons:

1. Central banks want to stock up on it in order to flatter their asset values, so they’d like to buy at close to rock bottom….and that can be arranged, sir, nodda praablum.

2. No western government wants gold to become a sure thing, because the minute it does the charge out of stocks will make the Little Big Horn seem a casual Sunday stroll by comparison.

So slowly but surely – with deliberately confusing little rallies here and there – the ‘perceived value’ of gold as a safe haven is being suspended by the movers and shakers. Take a look at this simple chart of the last six months in the tracked gold price:

Bearing in mind that, long-term, it’s heading down from a $1780 peak, here we see the summer 2014 slip from 1375(ish) down to 1250, then small rally to 1325, slow spiral to 1200, small rally to 1250, then a quick fall to 1150 in October, then yet another small rally back to 1200. Not what you’d call a reliable investment….but in a time of unparalleled economic uncertainty, abnormal to say the least.

Net however, the drops are consistently of the $50-75 magnitude. This is more easily visible from the 60-day chart:

Thus, a net drop to $1250, then a net drop to $1200. It’s too scarey to hold for most folks: the rallies are unconvincing, the drops too steep when they happen. Who needs an investment where the only relief you get is the odd respite?

The latest 30-day chart illustrates the pattern perfectly:

So with QE allegedly now gone in the US, you have to accept that the faux destruction of gold value will continue as long as the stock market has wobbles – as it will – and the CBs are stocking up – which they must. It’s not a good idea to do straight-line extrapolations of the process into 2015, because it will slow down or speed up depending on events. That’s to say, any prolonged banking contagion will speed it up, as will any sustained stock market correction. And then as the three things – bank viability, bourse over-valuation and gold destruction – interact, chicken and egg confusion will make it harder still to divine.

If you were to do that simple straight line thing, at the current rate of fall it’ll be late 2017 before the bottom (divined by the majority somewhere in the $750-850 range) is reached. And as a betting man, I’d say this is indeed the megalomanic (but completely flawed) game plan up there wherever the top is.

I expect two things are in train for when that bottom point is reached:

1. The suspension of private trading in gold

2. A Basel IX (or whatever the Latin numeral might be by then) which – on p.359, sub-para 14f – miraculously revalues gold at somewhere above its 2011 peak….due to the global uncertainty etc etc. Thus making the banks viable ha-ha.

A guesstimated (but partly informed) speculation on my part as to what happens next: there is no return to the Gold Standard….but faith is restored in sovereign debt by its bonds being gold-backed. This is far from being cloud-cuckoo: I know for a fact that a team within the ECB at least has been trying to make this idea fly under the watchful eye of Signor Draghi for the last eighteen months.

By then (so the theory says) western wages will have been depressed enough to make our exports more competitive, and real recovery will begin….all will be well, and Mario, Janet and George will live happily ever after in a ménage à trois, serviced occasionally by black hookers and white powder for the junior member.

£££££££££££££££££££$$$$$$$$$$$$$$$$$$

In practice, I think this scenario progression is simply more playing leapfrog on an asteroid while a sudden increase in the ferocity of the sun threatens to engulf the Earth. The obvious flaws in ‘the Plan’ are the following eventualities:

* Likely collapse of the euro in the face of a Franco-Italian budget/debt crisis

* Subsequent capital flight from Europe, and immediate contagion among US banks – along with likely stock market collapse down somewhere near real valuation

* Gold manipulation overwhelmed by sheer size of investment money in precious metals

* China comes to a dead stop in growth, and starts to suffer social unrest plus politico-military instability

* Bank of Japan balance sheet expansion meets its sticky end just about the time falling Petrodollar demand drops America firmly in the doo-doo, and Russia into default.

But then, I’m a glass half-empty sort of bloke. And a realist. The bottom (very short) line is I wouldn’t dream of going anywhere near gold in the current environment. But at the first sign of serious eurozone panic alongside US bank contagion, I will almost certainly take a punt. What you do is your affair, and this does not in any way represent advice from me.

I would ask anyone threading on this post to please refrain from telling me you know everything while I know nothing. Anyone who does will be expunged without appeal. I’m as usual interested in empirical stuff you think I might have got wrong, coming from people who know something. And as always, I’ll be fascinated by alternative views that are factually based and calmly argued. All personal insults and any use of the words “only a moron would” will also be filtered out automatically.

I accept that the lunatic, Yoblogging fringe will call this censorship, but in reality it is the prosecution of brainless license, and quality control of the level of debate The Slog tries to attract. No doubt this will also be dismissed as grandiloquent on my part by the current house Troll who thinks I haven’t noticed him. But sadly, they are a fact of internet life.

Thank you.

Yesterday at The Slog: Why the Ferguson screaming match will solve nothing