Gold in USD – 2 Yrs (100, 144, 200 DMA)

Gold was steady in trade in Asia until 0322 GMT when sharp selling saw gold fall 1.3% from $1,708/oz to $1,684.75/oz in minutes. The fall may have been technical in nature after last week’s 2% fall in US dollar terms. The selling had the hallmarks of a large sell order or liquidation and Reuters reports that “the approaching year-end and funding difficulties caused by financial market turmoil have reduced liquidity in the gold market.”

Market reaction to the failed EU Summit was that gold, the euro, European equities and ‘PIGS’ debt all came under selling pressure this morning.

Gold is again testing support at the 144 day moving average at $1,674/oz. Below that is the major support of $1,617.25/oz (see chart above).


Gold Spot $/oz (30 days)

With concerns about liquidity and solvency in the European banking system, there is lending and possibly even selling of gold by banks to raise much needed cash. This may be creating short term weakness in gold bit is bullish for gold in the long term.

The FT reported last week that “gold dealers” said that banks – “primarily based in France and Italy – had been actively lending gold in the market in exchange for dollars.”

The key question is who is lending and is their lending simply liquidity driven - to raise dollars or euros?

John Dizard, who frequently comments on gold in the Financial Times wrote on Saturday that,

“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.”


Cross Currency Table 

If this is the case it will raise further concerns about the possibility of double accounting of gold and concerns that much of the gold investments in the market are in fact ‘paper gold’ and not backed by physical as is believed by investors.

It will add to deepening concerns about the emerging scandal of rehypothecation where some banks, brokerages and dealers have been reusing the collateral pledged by its clients as collateral for their own borrowing.

Owners of gold exchange traded funds (ETFs) would be surprised and worried to discover that certain banks might be lending out gold that they have bought and believe that they own.

The leading gold ETF, GLD has been criticized by many analysts for its extremely complex structure and prospectus. Critics have also pointed out the possible conflict of interest in its relationships with HSBC and JPMorgan Chase which are believed to have large short positions in gold and overall lack of transparency. 

If as has been suggested, European banks are lending gold into the market that has come from exchange traded funds then this would validate the many concerns raised about the gold ETF market. Questions would again be asked as to whether many of the ETFs are fully backed by the gold that they claim to own in trust on behalf of clients. 

Already some hedge funds managers and investors have liquidated their ETF positions in favour of allocated physical bullion and we would expect that trend to accelerate as prudent investors rightly seek to avoid counter party and systemic risk.

OTHER NEWS

● The flow of gold from Hong Kong to mainland China rose 51 pct in October to a record 85.7T, bringing the total amount of gold shipped for the year to October to 286.6T. (Reuters)  

● Economist Dennis Gartman said he’s “being taken out of the remainder” of his gold position and investors should not own the metal priced in euros. Gartman had previously owned bullion priced in euros “Those not already out of the gold side of this trade should be out immediately,” he said today in his daily Gartman Letter. (Bloomberg)

● Gold could hit $2,500 if Euro fails in what would be a ‘horror story’ said Citigroup in a note. The Euro failing is a “low probability” event. Citigroup emphasizes it’s not forecasting $2,500/oz, though it says this could occur were the Euro to collapse. (Bloomberg) 

● Gold’s premium to platinum may widen in months ahead, UBS Says. Gold’s premium to platinum “has room for further widening over the next few months,” Edel Tully, an analyst at UBS AG, wrote today in a report. The premium was at 12.4 percent today, Bloomberg data show. (Bloomberg)

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