What’s Going on with Gold? ETFs vs. Bullion (Part 3), by Al Martin

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by Al Martin

What’s Going on with Gold? ETFs vs. Bullion (Part 3)

(5-21-13) People have asked me -- is the decline in Gold price tantamount to a correction?

In the recent price decline, Gold is acting as it should. In other words, Dollar moves higher, so the Gold moves lower.

It should be remembered that Gold is a commodity and not immune to the bust in the 10-year super-cycle which has affected commodities in general. This is moving all commodities lower. Copper has moved into fresh lows. Also Silver has been signaling lower Gold prices for the last ten days because Silver has moved underneath the Gold, meaning that it’s lower than where it was the last time the Gold is where it is currently.

Now we’re having a bust, a crack or an end of the 10-year super-cycle of commodities. Central bank driven liquidity, which had been supporting commodity prices, isn’t supporting them anymore because finally commodity prices got so far away from their underlying supply/ demand fundamentals that cheap money alone couldn’t support prices anymore. Therefore you’re seeing prices come back down to where they are reflecting supply/demand fundamentals.

What’s happening with commodities in general is that demand is declining while supply is increasing. Likewise this is also true in the Gold, which in the last analysis is just another commodity and trades like a commodity.

So what is the relationship between Gold ETFs, physical Gold and Gold futures?

In the last ten day period, we have seen the largest liquidation or the largest selling of Gold ETF shares since Gold ETFs were formed. Why? First it was a reaction to what the Dollar is doing. Dollar moves higher. Gold moves lower. Secondly since Gold is a commodity, commodities in general are moving lower because of the bust of the ten-year super-cycle. Thirdly, industrial and commercial demand for Gold must be sustained to support its prices – even though people think Gold is a financial metal.

Global manufacturing indices are falling in virtually every industrialized country. Also GDP is falling. And the commercial and industrial demand for Gold is also falling. This is an important component because even though Gold is a financial metal it is ultimately sensitive to supply and demand.

Recently there has been a lot of selling Gold in the ETFs. Gold ETFs are after all just a way of packaging it up. You’ve seen selling in the futures and in the cash market and in the scrap market. Of course it’s more pronounced in the ETFs because ETFs are now the largest single holders of Gold on the planet. They own more than any other central bank does now – about 21,000 tons of Gold. This bespeaks of how popular ETFs have become.

However not all Gold ETFs hold Gold. Since they are Exchange Traded Funds, some are formed as ETNs (Exchange Traded Notes) which means that as defined by Investopedia, they are “unsecured, unsubordinated debt security that was first issued by Barclays Bank PLC. This type of debt security differs from other types of bonds and notes because ETN returns are based upon the performance of a market index minus applicable fees, no period coupon payments are distributed and no principal protections exist.”

In other words they don’t hold Gold but they hold Gold futures. Not all commodity ETFs hold the underlying metal. The Gold ETFs, the Silver ETFs and the Copper ETFs, etc. – the ones that actually hold the underlying commodity are the ones that are generally bought by the gold bugs and the Unwashed. And they are those who continuously lose money every time they try to trade it.

The ETFs and ETNs that do not hold the physical commodity but hold some sort of paper substitute like futures or options – those are the ones that are generally traded by professional traders. That’s why they’re not as large. For every professional trader there are ten who are members of the Unwashed.

Now what the Unwashed are finding out is that too much Gold concentrated in the ETFs relative to Gold’s underlying supply/ demand equation. People think that Gold is a deep and liquid market but it isn’t.

People ask me - so is the price of Gold being manipulated? But I would ask who has a vested interest in Gold to manipulate it?

Anybody who has tried to manipulate Gold – and everybody has from George Soros to John Paulson – has been able to do it over the “short run,” but you can’t manipulate it over the long term – particularly if you’re trying to force the price higher.

In other words you could manipulate the price of Gold for a number of months but you can’t manipulate the price over the long term. Nobody has that much money.

History reminds us of how the Hunt brothers tried to manipulate the price of Silver. They soon found out that even with a billion dollars – at a time when a billion dollars was a lot of money – it didn’t work out. They started buying Silver when it was about $3.50 in August of 1975. Ultimately however they wanted to be sellers but they found that they owned so much of the stuff that they couldn’t be sellers. Gold is the same way.

Despite what the Unwashed think about Gold, it’s not a particularly deep or liquid market. It’s not like Unites States Treasury Bonds or a market where there is real depth and real liquidity.

So what’s the reason for the mythology of Gold and the glamour connected with Gold?

Gold is a store of wealth, something you should own. Even the old time stock guys always said you should have 5% of your holdings in Gold. Nobody out there was really pooh-poohing it. It was always considered as something you should own some of. It’s just that people got wild with it. People see the price go up and they jump on it. And that causes the price to go up some more. Then what ultimately happens with Gold is you get too many of the Unwashed loaded up with it which creates the speculative bubble and eventually comes the bust.

Whether you’re trading Gold or whether you’re trading Widgets, the principle is the same.

Nevertheless Gold becomes a religion for some people in some countries, not necessarily in the United States, especially in other countries that have far less stable currencies. Then it becomes a necessary religion. But if you live in the United States or you’re a US citizen, domiciled in the United States, there isn’t a reason for you to have more than 5% of what you’ve got invested in Gold because you’re already invested in Dollars which is going to be the surviving currency of the ongoing global currency war.

The only people who made any money in Gold are those that mine the stuff and those that trade the stuff. People who try to hold it as a long term investment have never made any money because they’re not traders and they shouldn’t be buying it as an “investment.”

To buy something for an investment – the shills love to use that expression – you have to be sufficiently knowledgeable about the underlying market and the external factors that affect it to know when the market has reached lows or tops. If you don’t know that, then you shouldn’t be buying it – as an “investment.”

So why do gold bugs exist? There is this large element within the Unwashed, even as the Unwashed are divided up into different sub-categories, though most of them are Working Class Republicans. What fosters these big run-ups in Gold is when the idea begins to take hold of economic collapse. When that idea begins to become prevalent, that’s when you see big run-ups in Gold.

You could call it Apocalyptic Gold Fever. There are two circumstances that allow Gold prices to really rise and go on tears – and this has been true throughout history – A. Fear of inflation or B. Fear of economic collapse. Right now it’s obviously not fear of inflation that’s driving Gold prices – because inflation is falling globally. Now it’s B – fear of economic collapse.

People see the enormous accrual of governmental debt. They know that eventually that debt reaches a level that it can’t be sustained – which effectively it has already reached – in all the industrialized nation-states. The gold bugs are right when they say that the planet is beyond the point of fiscal return so to speak. We are beyond that point. Economic collapse is now inevitable and they are correct to say that, but the timing of economic collapse is key. But that is a very difficult thing, particularly for the Unwashed, to get their minds around, as we have written before – because they underestimate the power that first-world governments, the G-20 nation-states and their central banks, have to keep the dead horse, i.e. the global economy, on life support.

Why? Because they don’t understand enough what central banks do nor do they understand enough about economics. It’s a false reality they create in their own minds due to their ignorance of economics which allows people like me to take advantage of them. Anybody with knowledge will invariably attempt to profit off the backs of those who do not possess it. That’s why the world works the way it does.

All wealth is built on that same principle. That’s what creates the trickle up effect. What motivates them is not always greed. It’s wrong to say that the Bushonian Cabal for example is motivated by greed or power because they need that power to cover up what they’ve already done. That’s what a cabal ultimately becomes. However cabals could not exist if the Great Fraction did not exist if the planet was not an 82/ 18 planet, i.e., 82% Indians and 18% Chiefs. So what makes the difference between Indians and Chiefs? The Chiefs understand and they have knowledge.

The form in which you own Gold and how long you hang onto it depends on the reason why you want to own it. If you want to own it because you are fearful of economic collapse, you are looking at your Gold as the money of last resort. Then you want to be a long-term holder of it. You don’t want to be selling it just because the price of Gold is cut in half. You want to simply hold it forever.

Those, meaning the Unwashed, who sell Gold as it’s going down -- they are the future buyers who will be buying it when it gets back above where they sold it.

In so doing, the Unwashed do their part in the trickle-up wealth mechanism. And that’s the way it’s meant to work. In other words ignorance always has consequences.

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

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