Rathbun: Seeing the obviousWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
This past week has been extraordinary in a variety of ways. The bombing in Boston dominated the news and ended with the death of one of the suspects and the capture of the other. I believe justice will eventually prevail but not without some frustrating twists and turns.
One of the big economic stories last week was the movement in the price of gold and silver. Similar to the Boston bombing, there is talk of conspiracy and manipulation in the movement of gold prices. I see these as possible, but maybe not probable. Either way it will be debated for a long time.
On April 12 at the open of the market here in the U.S. an order was placed selling 3.4 million ounces of gold for June delivery , which brought gold to $1,540 per ounce. That alone is a big order but just a couple of hours later another order hit to the tune of 10 million ounces for June delivery. These two orders combined are the equivalent of 15 percent of the world’s production for the year.
As these orders get processed, a tremendous amount of downward pressure is put on the price of the underlying asset. That, in turn, causes stop limits to hit and margin calls to be placed, further pressuring the price down. If you had sold gold short prior to the orders you would have made a considerable amount of money on the trade. This is where the thoughts of manipulation come in, because there are only a few entities big enough to initiate transactions of this size.
We know who these entities are and we know they were involved with the trades, but trying to prove the coordinated manipulation between them is difficult. All we can do is look at the overall actions and try to determine the motivation and connect our own dots as to who and why. Once again, like the investigation that is going on in Boston, we want to know if they were part of a larger group, if it was all planned and paid for by a foreign entity or a domestic entity, and if there are more plans like this on the drawing board.
Back to gold — gold is generally what we call a Giffen good. A Giffen good is one that actually sees a spike in demand as its price rises. Conversely, demand usually drops along with the price. While this concept is widely known among economists, there are relatively few examples in the real world outside of commodity markets. Gold is the exception. In the past, as the price of gold dropped it was scorned and dishoarded by individuals as well as by central banks.
What is more important is the ratio of gold’s stock to its flow. This, very simply, is how much gold is actually on the market to change hands. Someone, or an entity of some type, owns virtually all the gold in the world. What if they just simply decided not to sell any more for a while? This would cause what we call a shortage, not necessarily of the metal but of the availability of the metal.
If this situation were applied to automobiles, meaning a manufacturer of cars made the cars but decided not to sell any, this would eventually cause a shortage of cars. However, the manufacturer would have to sell some of the cars for cash or the cars would be worth nothing to him. Gold is not that way. With gold, the holder need not exchange his gold for dollars, especially if there are ever-increasing dollars pursuing the metal.
What am I trying to say? Buy things that hold their value over time, especially when they are cheaper now than they have been in a while. In the first half of April the U.S. Mint has sold more gold than the previous two months combined and we still have a week left in the month. Take the hint.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard every day on 1370 WSPD at 4:06 p.m. on “After the Bell,” every day on the Afternoon Drive, and every Tuesday, Wednesday and Thursday evening at 6 throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at firstname.lastname@example.org.