I wanted to write a short note to address the current pullback in gold and silver. It would be easy for me to point to the paper market manipulation that is apparent in the major sales that take place almost daily between 4AM and prior to the US market open at 8:30 EST. I have written about the market orders at times when activity is at its thinnest and anyone “investing” would not make trades this way.
The concern that I have right now is that this pullback, while the manipulators may be playing a part, could be larger than we can currently see.
For the last few years, we have been tracking the market order sales and days later finding out from King World News, Andrew McGuire (Metals Trader) and others how much paper gold was dumped at truly odd times. Actually, today in looking at a Kitco chart there were moves at around 4AM and again at 8AM. There was another drawdown around 11AM and this is somewhat out of character as far as what we have been witnessing in the past few years.
At this time I can’t know what the actual numbers are yet but the charts show major sales at times when buyers are scarce in most instances.
My concern right now is that this may just be one reason for this pullback. If we remember back to 2008 gold acted as an early warning system for the rest of the economy and markets. It was the first asset to pull back and the first to rally back. Actually, it rallied prior to stocks and bonds because people bought it as a hedge against the traditional assets that were plunging in value in unison. It was a classic credit event.
As the central banks started to “print” money, issue bailouts and buy assets that nobody else would (or could) buy gold rallied because of the “printing” taking place.
As I wrote yesterday the SIFI (Systemically Important Financial Institutions) banks saw their share prices fall for 12 days in a row. Make it 13 as yesterday they fell again. This may be showing some problems that we can’t see right now as even when the stock markets attempt to rally the selling seems to be overwhelming the buying. This COULD be a hedge fund (or funds) and a bank (or many banks) unwinding some positions that have gone bad. Unfortunately, we won’t know about it until it is too late to do anything about it.
Remember that these banks and many hedge funds are global entities. In China, the National Institute for Finance and Development, is warning that because of market turbulence and trade war fears, along with leverage to purchase financial assets at levels not seen since 2015, there could be a financial panic.
Back in 2015 the pullback in Chinese stocks erased $5 trillion in market value. Further reasons for their concern is liquidity shortages and rising interest rates. They are even calling on the police to prepare for whatever they see coming. In 2015 the authorities, you may remember, were arresting short-sellers.
Let’s not forget that China had $1 Trillion in debt in the year 2000 and now sports over $30 Trillion in debt. (King World News, Gerald Celente, Bloomberg and Barrons) How dynamic could ANYONE make an economy look if you had $29 Trillion in money from nowhere to put to work in 16 or 17 years?
China is not alone. Japan is “printing” Yen and purchasing ALL Japanese government bonds, buying massive amounts of ETFs (as of 6 months ago they held 74% of Japanese ETFs) and months ago it was announced that they were a top ten shareholder in 90% of the Nikkei 225 according to Bloomberg (4-3-18)
Emerging market currencies have been getting beat up. That makes their debts, many times issued in US Dollars, harder to pay and has often led to the individual countries increasing their interest rates to defend their currencies. While it is painful for the countries and their citizens it could be doubly painful for a hedge fund, a bank or even a leveraged ETF that has major bets on higher currencies or lower interest rates. Leverage, particularly the magnitude of what the SIFI banks are famous for, can make these trades unwind in a less than orderly manner- in other words they may get a margin call and then have to either add cash to the position, sell an asset to cover the margin, or eat the loss. At this time, if the entity that gets the call has no cash available and can’t or won’t sell the position the margin clerk will decide what gets sold and that would generally be whatever is most liquid at the time. Maybe this is why the DOW is down so frequently lately???
My thought here is that, as central banks are “printing” and buying, others may be being forced to sell and that could be a reason why there is massive volatility but little movement in stock averages overall.
Oil is rising in price. While many will agree that it is painful at the pump Gerald Celente (Trends Forecaster) reports that this is like a $30 billion tax on Americans. This means that the $30 billion that could have went into retail sales and restaurants will be poured into our gas tanks.
We are also seeing the housing market slow down and durable goods falling in the latest reports- but hey don’t worry- it’s all GREAT!
The central banks, which have inflated and “printed” in unison in past years see at least two major players- the Fed and ECB not only pulling back the stimulus but threatening to actually drain liquidity from the markets in the coming months.
The world is connected in such a way that if major players change course it will have repercussions throughout the rest of the world. It could be an interesting ride!
What I am saying here is that it may pay to keep your eyes on ALL of your assets and at least take some action like stop losses on your stocks that have large gains in particular and possibly reduce risk in all of the traditional asset classes.
Of course, everyone has different reasons for holding different assets and there is not a one-size fits all solution to any investment theme but I believe caution may be warranted far more than we are being led to believe.
Mike Savage, ChFC, Financial Advisor
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