In a blog post a couple of weeks ago I noted that it’s normal for large and fast price declines in the major financial markets to be accompanied by unusually-high trading volumes, meaning that it’s normal for large and fast price declines in the major financial markets to be accompanied by increased BUYING. I then wondered aloud as to why it is held up as evidence that something nefarious or strange is happening whenever an increase in gold buying accompanies a sharp decline in the gold price. Right on cue, ZeroHedge.com (ZH) has just published an article marveling — as if it were an inexplicable development — at how the recent sharp decline in the gold price was accompanied by an increase in buying.

As is often the case in the realm of gold-market analysis, the ZH article incorrectly conflates volume and demand. The demand for physical gold must always equal the supply of physical gold, with the price rising or falling by the amount needed to maintain the balance. If sellers are more motivated than buyers, then price will have to fall to restore the balance. The key point to understand here is that for every buyer there must be seller, and vice versa, so the purchase/sale of gold does not indicate a change in overall demand — it only indicates a fall in demand on the part of the seller and an exactly offsetting increase in demand on the part of the buyer. It is also worth noting — even though it should be obvious — that demand for physical gold cannot be satisfied by paper gold.

Trading in paper gold (gold futures, to be specific) clearly does have an effect on the price at which physical gold changes hands. The paper and physical markets are inextricably linked, but this link does not make it possible for the demand for physical gold to rise relative to the supply of physical gold in parallel with a falling price for physical gold.

What happens in the real world is that when the futures market leads the physical market higher or lower it changes the spread between the spot price and the price for future delivery. For example, when the gold price is being driven downward by speculative selling in the futures market, the price of gold for future delivery will fall relative to the spot price. In a period when risk-free short-term interest rates are being pegged at or near zero by central banks, this can result in the spot price becoming higher than the price of gold for delivery in a few months’ time. This creates a financial incentive for other operators in the gold market to buy gold futures and sell physical gold. For another example, when the gold price is being driven upward by speculative buying in the futures market, the price of gold for future delivery will rise relative to the spot price. This creates a financial incentive for other operators in the gold market to sell gold futures and buy physical gold.

The bullion banks are the “other operators”. They tend to focus on trading the spreads between the physical and futures markets. In doing so they position themselves to make a small percentage profit regardless of the price trend and therefore tend to be agnostic with regard to the price trend.

After harping on about the dislocation between the physical and paper gold markets, a dislocation that doesn’t actually exist but makes for good copy in some quarters, the above-mentioned ZH article moves on to the level of the CME (often still referred to as the COMEX) gold inventory. To the sound of an imaginary drumroll, the author of the article breathlessly points out that the amount of “registered” gold at the COMEX has dropped to a 10-year low and that the amount of “open interest” in gold futures is now at a 10-year high relative to the amount of “registered” gold.

The information is correct, but isn’t relevant other than as a sentiment indicator. It’s a reflection of what has happened to the price over the past few weeks and the increase in negativity that occurred in reaction to this price move. It is not evidence of physical-gold scarcity.

I currently don’t have the time to get into any more detail on the COMEX inventory situation. However, if you are interested in delving a little deeper you could start by reading the July-2013 article posted HERE. I get the impression that this article was written in response to the scare-mongering that ZH was doing on the same issue two years ago.

Thanks largely to the unprecedented measures taken by the senior central banks over the past few years, there have been many strange happenings in the financial world. However, the increased buying of physical gold in parallel with a sharply declining gold price and the reduction in COMEX “registered” gold cannot be counted among them.

The answer to the first question is ‘sort of’. The answer to the second question is no. The effects of having an institution with the power to manipulate interest rates and the money supply at whim are equally pernicious whether the institution is privately or publicly owned. However, if you strongly believe that the government can not only be trusted to ‘manage’ money and interest rates but is capable of doing so to the benefit of the economy, then please contact me immediately because I can do you a terrific deal on the purchase of the Eiffel Tower.

The fact is that the Federal Reserve would be a really bad idea regardless of whether it were privately owned or owned by the US government. The question of ownership is therefore secondary and the people who stridently complain about the Fed being privately owned are missing the critical point. In any case and as I explained in an article way back in 2007, the Fed is not privately owned in the true meaning of the word “owned”. For all intents and purposes, it is an agency of the US Federal Government.

In addition to the work of G. Edward Griffin referenced in my above-linked 2007 article, useful information about the Fed’s ownership can be found in a 2010 article posted at the Mises.org web site. This article approaches the Fed’s ownership and control from an accounting perspective, that is, by applying Generally Accepted Accounting Principles (GAAP), and concludes that:

“…the Fed, when tested against GAAP as the Fed itself uses it in the Fed’s assessments of those it regulates, is a Special Purpose Entity of the federal government (or, according to the latest definition, is a Variable Interest Entity of the federal government). The rules of consolidation therefore apply, and the Fed must be seen as controlled by federal government, making it indivisibly part of the federal government. The pretence of independence is no more than that, a pretence.

There is, however, no denying that the banks have tremendous vested interest in influencing the policies of the Fed, nor that the power being so narrowly vested in the president makes him a special target for influence. Still, the power to control the Fed is not in the hands of its “owners” but firmly in the hands of the federal government and the president of the United States.”

It is clear that the Fed was established by the government at the behest of bankers with the unstated aim of facilitating the expansions of the government and the most influential banks. It is effectively a government agency, but due to the influence that the large banks have on the government it will, if deemed necessary by the Fed Chairman, act for the benefit of these banks at the expense of the broad economy. The happenings of the past eight years should have left no doubt about this.

In numerous TSI commentaries over the years I’ve written about the confusion in the minds of many analysts regarding what constitutes gold supply and the relationship between supply, demand and price in the gold market. I’ve also covered the issue several times at the TSI Blog, most recently on 24th June in the post titled “More confusion about gold demand“. I’m not going to delve into this subject matter again today other than to use the example of last Monday’s trading in GDX (Gold Miners ETF) shares to further explain a point made in the past.

On Monday 20th July the GDX price fell by about 10% on record volume of 170M shares. Since every transaction involves both a purchase and a sale, more GDX shares were bought last Monday than on any other single day in this ETF’s history. And yet, this massive increase in buying occurred in parallel with a large price decline. How could this be?

Obviously, the large price decline CAUSED the massive increase in buying. Many holders of GDX shares were eager to get out and the price had to fall as far as it did to attract sufficient new buying to restore the supply-demand balance.

It’s normal for large and fast price declines in the major financial markets to be accompanied by unusually-high trading volumes, meaning that it’s normal for large and fast price declines in the major financial markets to be accompanied by increased BUYING. Most people understand this. So why is it held up as evidence that something nefarious is happening whenever an increase in gold buying accompanies a large decline in the gold price?

I can only come up with two plausible explanations. One is that many analysts and commentators switch off their brains before pontificating about gold. The other is that the relationship between gold supply, demand and price is deliberately presented in a misleading way to promote an agenda. I suspect that the former explanation applies in most cases, meaning that in most cases there’s probably more ignorance than malice involved.

Here are links to the two best articles I’ve read about the Iran nuclear treaty. The first is by David Stockman, an author, a blogger, a Wall Street veteran, and the Director of the Office of Management and Budget under President Ronald Reagan. The second is by Uri Avnery, a writer, the founder of the Gush Shalom peace movement, and a former member of Israel’s parliament. Although they tackle the issue from different perspectives, both articles are rich in historical information and insightful analysis. One thing Stockman and Avnery — and, as far as I can tell, everyone who is objective and well-informed on the subject — agree on is that Iran did not have a nuclear weapons program and probably had no intention of starting such a program.

http://davidstockmanscontracorner.com/all-praise-to-barrack-obama-hes-giving-peace-a-chance/

http://jewishbusinessnews.com/2015/07/17/uri-avnery-the-treaty/