THE GOLD DROP: How inaccurate information and market ignorance were behind it

On December 18th 2012, a firm of UK ‘Wealth’ managers bought just over £17,000 in a Gold ETF via brokers Charles Stanley on my behalf.

Two days later, gold prices plunged, hitting lows not seen since August, after the U.S. Commerce Department reported an unexpectedly robust reading on third quarter U.S. gross domestic product.

As a result of this ‘robust’ outlook, my investment dropped $25 an ounce immediately. But in real terms, the gdp outlook is about as robust as the Zimbabwean dollar. The revision was driven almost entirely by increased inventory accumulation and a jump in federal spending — factors unlikely to be repeated in the final quarter of 2012.

“It’s a nice headline number,” said Nigel Gault, chief United States economist at IHS Global Insight, “but it exaggerates the underlying momentum in the economy. Sustainable improvements in growth are not driven by inventories.” (…is the correct answer).
Furthermore, the figures show that spending by businesses on equipment and software declined by 2.7% in the third quarter – the first decrease since the end of the recession in mid-2009, and a classic symptom of poor investment confidence.

In the greater scheme of things, it doesn’t really matter: once the Q4 data show a softer outlook (and the EU news gets worse) in the New Year, gold will more than recover. (There’s also a seasonal factor here too, in that funds often run down holdings in this kind of business during December).

But as ever, caveat emptor applies: ignorance and stupidity on the part of markets are often just as dangerous as deliberate fixes. These ‘markets which must always decide’ are only motley collections of panicky money-obsessed neurotics. Markets ‘deciding’ is a long way from markets being ‘right’; but that’s just another feature of the many-layered hill of BS that is neocon theory.

However, the upbeat report from Commerce makes my nose twitch a little in retrospect. Bureaucratic statisticians lacking even an iota of common sense is all well and good as an explanation, but surely no Federal department is that dumb when it comes to releasing numbers of such apparent import.

On an even less trusting note, I did like the frank, zero-BS accuracy of this output from Zero Hedge yesterday:

Finally, we must question the morality of Fed programs that trick people (as if they were Pavlov’s dogs) into behaviors that are adverse to their own long-term best interest. What kind of government entity cajoles savers to spend, when years of under-saving and over-spending have left the consumer in terrible shape? What kind of entity tricks its citizens into paying higher and higher prices to buy stocks? What kind of entity drives the return on retiree’s savings to zero for seven years (2008-2015 and counting) in order to rescue poorly managed banks? Not the kind that should play this large a role in the economy.’

Precisely the same entirely deserved comments apply to the shower we have ‘managing’ things over here in the UK. They should of course be managing things for us (we having paid through the nose for this disaster from the start) but they are, as ever, managing things on behalf of those on their side, with money and/or the capacity to ruin them. This applies as much to Labour vis-a-vis Northern Rock as it does to the Tories over Hackgate and banker bonuses.

Vaguely related: WTF is Plebgate really about, Episode 8,109


47 thoughts on “THE GOLD DROP: How inaccurate information and market ignorance were behind it

  1. “You have to be in it to win it”.
    So, as long as you possess your gold/silver (important) and it it is buried/sunk somewhere safe outside the clutches of others (important), then you will be safe.
    I’m just left wondering what aspect of this BS Market is going to “let go”, allowing precious metals to come into their own.
    I reckon the demand in the p.metals will force the issue itself, as they can only be manipulated for a finite stretch and demand is ramping up across the spectrum of purchasers. Something will break and the potential will be overwhelming.

  2. John – I’m curious why you chose to invest in an ETF when I was under the impression that the only safe way for a small investor to own PMs was gold coins as you have physical possession, but they are too small to be tainted with tungsten and are not subject to tax?

  3. OT (sorry), but John, could you please give a reference to the EU directive/etc you alluded to in the second paragraph (about Gay Marriage) of your “Drilling to Insanity” piece (Dec 13)? Michael Fabricant denied that it was EU related. Thanks

  4. ”……What kind of entity tricks its citizens into paying higher and higher prices to buy stocks?…”

    QE has a role in this. The banks bought stocks with the cash….so you could say that the market has about 25% funny money giving it the ‘pumped up’ look. Commodoties suffered the same fate to a smaller extent.

    We only look for quick yield ( in and out )…..we don’t want to own anything except CASH.
    Yes…..hard, sweet smelling, paper, CASH…….
    Just like the politicians, the bankers and all the other investors spivs.

  5. You bought a paper promise which makes you complicit in your own maniputlation – a shell game where even allocated gold is promised to multiple paper promise/certificate-holders in this infinately corrupt financial ponzi scheme we are all required to believe in. I have no issue with anyone trading paper promises but to INVEST in them? That’s a whole different ball game. A bit of the physical stuff on hand (NOT in the bank which will use it as collateral to dig deeper into the shell-game itself knowing not depositors will ask to see/collect it at the same time) is probably what’s prudentially needed against the time when the ponzi implodes.

    There’s another risk to deal with then of course – confiscation. But black markets always thrive in hard times and they usually wipe their back-sides on paper promises.

  6. LOL never mind John, a stockbroker is someone who invests your money until it’s all gone. Would you hand over money to a stranger at the door of a casino to spin the wheel on your behalf? Didn’t think so. Intelligent people should make their own investment decisions. The majority of fund managers under perform the Market and charge you handsomely for their mediocrity. Most of them are hooray henrys who occupy their positions through nepotism and no more about spending daddy’s money than investing yours. On Dec 18th most technical traders were selling gold which had dropped under significant moving averages and only had price support at it’s 200 day moving average, the most watched price support on the planet. Your manager did not allow this supportvto be tested and IMO assumed gold might bounce . Poor show. Now the 200 day moving average is acting as resistance. Support below is at 1600 then 1550 and if that breaks it’s 1200. BTW there is huge risk attached to ETFs as nobody knows what’s in them and whether they truly reflect the Market you are attempting to invest in. They carry no stamp duty on purchase but that’s the only advantage. A good way to invest in a stock index provided the ETF truly reflects it’s constituents. I will inform this blog, for fun, when I buy into gold again, what my technical entry is and what my stop loss (my bailout price if I am wrong, to take a small loss instead of running a big one) is. Always remember chaps there are no free mar keys, the whole thing is controlled by the central bank/ polical elite mafia and they will decide what goes up and what goes down. Investors can only try to follow the trend.

  7. THe new 2013 £100 Britannia is 1 ounce fine gold 999 fine as opposed to previous years 22 carat. It is exempt from capital gains tax as are sovereigns. Beautiful coin, makes sense to own..

  8. Doubt we will ever see confiscation again as it would only give more purchasing power to the yellow metal. When FDR introduced this concept, a fairly small percentage handed it over at about twenty dollars an ounce, and when he had as much as he thought the fools would give up, he reset the price at thirty dollars an ounce. Nobody should ever forget this. If any sovereign demands gold from it’s fools ( see Argentina of late ) it may well be an indication to buy ( but see my post below). Equally driving down the electronic price can achieve the same objective whilst they accumulate the physical. Just look at the intense interest in physical gold of late (venzuela, Germany, even Her Majesty). Chelski boss has his own gold mines too. Japan has started debasing the Yen with renewed vigour which means they will all follow suit in the race to the bottom. Own physical chaps, not a paper promise.

  9. Physical and paper markets are showing signs of divergence. At which point, true value will begin to be established.

    John’s purchase of ETFs is perfectly understandable in the current climate. Physical is getting near impossible to buy. Make of that what you will.

  10. The other half of the ETF worry is whether one believes that Black Rock (or whoever originates the ETF) will not do an MF Global.

  11. The rope used by the market is getting frayed and stretched. The two teams, sentiment and fundamentals, pull harder and harder getting further apart. At the moment all bets are off on the winner but the rope will snap before mid 2013 and the fundamentals will surely win. Check out the grain markets. Seasons greetings to The Slog and all the best.

  12. Eloquently true, Milkman. And as an island nation we should not need reminding that riding out a storm with frayed, tatty ropes is just asking for trouble. In the meantime, perhaps JW might care to enlighten us on what moment of madness caused him to buy a gold backed ETF.

  13. I think you were distracted, shouldn’t make decisions like that.
    You paid at least two parties commission, and got a piece of paper in exchange (probably didn’t even get that).
    Seriously, PHYSICAL gold, sliver or land only; you know that.
    We are now in a different world. The Mayan calender was right, people just haven’t noticed it yet. The USA fell over the fiscal cliff, the dollar died on Friday. All the paper is worthless.
    Sovereign nations are buying physical gold, not dollars or treasury bonds or paper certificates.

    Whenever the paper price recovers (and they are manipulating it on purpose up and down until they lose control completely soon), convert it to physical. (double-seriously)

  14. Hold strong. A decade of investing has taught me that when the fundamentals are a no brainer, as with gold rising with QE4, then the only way the market can steal your money is by delaying the inevitable move, and this has happened to me several time. I have now learned to be patient. Gold’s consolidation has been running for a year and a half now, and the breakout is near. Bull markets always shake out the weak hands before continuing to advance, especially volatile markets like gold and silver.

  15. Paper gold, the “real thing”? Let’s face it, fellow Sloggers: we are doomed…nothing we can either do or say (as a piffling but intelligent minority) is going to change that. KFC: I am willing to bring my garden tools and family to yours whenever, just tell me when (PS in case TPTB are reading this, I have NO PHYSICAL GOLD to take with me – I lost it in a boating accident on the same day that Maxwell Snr’s cigar got wet).

  16. @doomed: it’s amazing that as an intelligent group of people, we turn out to be such poor boatmen. I too befell some poor luck and my PMs also dwell at the bottom of a body of water (who’s name I can’t remember)

    The sea, she is a cruel mistress…

  17. I have to say, I had to read JW’s opening paragraph twice to make sure I had not misunderstood it. I was surprised to read that he had purchased ‘paper’ gold. How much is it leveraged these days? About 100:1 apparently. Not a contract I would enter into.
    Funnily enough I buried all my gold and when I returned for it some years later they had built a block of flats there!
    I might take you up on your kind offer WAD!

  18. Gold Stackers: making foolish decisions about PM storage and generally being “butterfingers” with the stuff since 2008. ;)

  19. Two words John, MF Global,

    If you don’t have your bullion in your possession then you really have much more faith in the ‘system’ than I do.

    It is, however, your ‘wealth’ to lose.

    Only physical silver for me.

    Merry Christmas

  20. The party faithful elected as leader a boy with absolutely zero experience outside politics. Because the alternative had shown itself to be disastrous, the boy became Prime Minister. What else is to be expected?

  21. One thing I find amazing is that I’ve never seen a gold or silver bar with a Chinese or Russian stamp on them. I bet those vaults in Beijing had some new additions after Thursday’s falls. No wonder the bullion dealers in the UK had bugger all. Bit like the Bank of England.

  22. “New 2013 Chinese 1/2oz Panda Gold Coin. This coin weighs 1/2 of a Troy Ounce of 99.99% Fine Gold. The design of the 2012 Panda shows two pandas, an adult and a baby among the bamboo. The Panda Coins are minted at several mints across China.”
    £561.95 + P & P
    Although when I tried to place an order they said not in stock!

  23. Mmmmm. Their whole range of Panda coins are now marked
    “Prices available now, stock arriving in 10 days”

  24. OAH, Your link gives”
    Error 403 Forbidden

    Guru Meditation:

    XID: 248909827

    Varnish cache server


  25. On buying physical PM: I understand that UK dealers nowadays request explicit personal data identifying purchasers, alleging that such is an HMRC requirement. (That may be true if purchases are envisaged to run to €15000 or more – money laundering regulations – but I doubt that it is true otherwise).

    Hmm, if I buy a few sovs from a UK dealer and leave my personal data on his creaky database, do I not stand to receive unwelcome visitors? The client database of a PM dealer would seem to offer very rich pickings to organised crims able to gain access to it e.g. by hacking or by compromising staff, and then sending the boys round to an efficiently targeted ‘clientele’.

    Is there still any way to invest in PMs with anonymity, so as not to invite nocturnal unpleasantness?

  26. The US is getting away with massive money printing in part because most of the ‘developed’ economies are doing likewise. Paper money (in which sovereign debts are denominated) is being devalued on an unprecedented global scale but most developed / indebted economy currency pairs are moving in tandem so the devaluation of the dollar is not as evident as it would be otherwise. Gold currency on the other hand cannot be printed and, if left to float free of manipulation, would serve as a clear illustration that the mighty dollar has no clothes – with the potential of causing panic. My conjecture is that the Fed is ‘lending’ gold to compliant organisations to sell short, in volume, and at strategic times, to suppress the price in order to disguise the real weakness of the dollar. A dangerous strategy, yes, but do the gold loans ever really need to be repaid? Attempts by US politicians to audit the Federal Reserve’s gold stocks have been successfully rebuffed.

  27. As always in case of unwelcome visitors you say:

    “i lost it all in a boating accident. Now f**k off!”

  28. If you are really wealthy, then you store it in a flat which is on a first floor, with an entry security door; you don’t store it in the stately home. “Normal” people should find somewhere that it will take you the best part of a day to get your hands on it. Burglars tend to be fast and look only in obvious places. Don’t tell your partner or spouse unless your relationship is particularly stable.

  29. Your error is assuming the price of gold went down because of some report. The price of gold has contnued to go down in spite of all the positive information that should have been driving it up. Why would you continue to fight the obvious fact that gold continues to drop and has failed EVERY rally attempt since it topped?

  30. Gold doesn’t go up because of positive information, it goes down. That used to be the point of it, and it will be again. What you suggest is, I’m afraid, nonsense

  31. Market ignorance seems prevalent at the retail level in Asia – see this brief write-up of a US$3.3 billion scheme that is under official scrutiny at the moment, with investors screaming for the regulator to back off so they can (hopefully) get their monies back:

    Now, with CombiBars, another seemingly “innovative” scheme has been set in motion in Aisa – see the last video:

    Based in Aisa, I can say that the manipulation of gold prices often reported on this blog by John rarely makes headline news over here. Perhaps, that may explain why “innovative” ideas pitched at the man-in-the-street seems to easily gain traction and quickly suck in millions of dollar and quickly balloon into the billions!

    Apart from online ones, are there such street-level “innovative schemes” in the West? Can someone share?

  32. Market ignorance seems prevalent at the retail level in Asia – see this brief write-up of a US$3.3 billion scheme that is under official scrutiny at the moment, with investors screaming for the regulator to back off so they can (hopefully) get their monies back:

    Now, with CombiBars, another seemingly “innovative” scheme has been set in motion in Asia – see the last video:

    Based in Asia, I can say that the manipulation of gold prices often reported on this blog by John rarely makes headline news over here. Perhaps, that may explain why “innovative” ideas pitched at the man-in-the-street seems to easily gain traction and quickly suck in millions of dollar and quickly balloon into the billions!

    Apart from online ones, are there such street-level “innovative schemes” in the West? Can someone share?

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