Jul 072015
 

The failure of gold to respond to Greece has attracted a lot of mainstream and goldbug comment. Goldbugs have focused on increases in demand as reported by coin dealers in articles such as this Bloomberg piece or directly by dealers such as USAGOLD (saying they had “experienced a strong surge of interest in June … [on] mounting concerns about Europe”) and Bullion Star (noting that “demand in the last week leading up to the Greek referendum has been about 150 % higher than normal”).

While Bullion Vault saw “internet traffic from Greece rise 50% during the first half of this year from the Jan-June period of 2014” they reported no new accounts from Greece, noting that “the preferred choice for Greeks buying gold has remained bullion coin. Specifically gold Sovereigns” which can only be bought from their central bank, the Bank of Greece – the volume of which had doubled according to the Royal Mint.

Predictably, goldbugs jumped to their favourite “disconnect” and “conspiracy” narratives, noting the failure of gold to go up in the face of this strong demand as proof of central bank market manipulation/rigging. Now don’t get me wrong, I certainly don’t deny central bank activity in the gold market (BTW, interesting that Barry didn’t respond to GATA’s questions). I mean, central bankers don’t pay $4,500 for the World Gold Council’s Executive Program in Gold Reserves Management to learn how to store, stocktake and shine up their stash.

However, sole focus on such a conspiracy narrative ignores the equally powerful professionals in the mainstream financial markets, the sizable money they control, and what narratives they believe about gold. I think we can’t ignore the question Koos Jansen asks: “are financial markets suffering from Euroscrisis fatigue?” and Blogger Bullion Baron sums up the attitude of these professionals well:

“A) After 4+ years of talk, Grexit has become the boy who cried wolf and the market now doesn’t pay the situation the attention it deserves.
B) The market (rightly or wrongly) thinks the Greece crisis no longer matters and will resolve itself without impacting global markets regardless of referendum or agreement outcomes.”

Here are just a few quotes to give you an idea of their views (size of their fund in brackets):

  • Huntington Asset Advisors ($1.7b): “Too many of the people who bought gold late in the rally have been scared off … people simply won’t go back to it.” (link)
  • Stifel Nicolaus & Co ($170b): “If we continue to see forward progress in the global economy, if the Fed continues to march towards interest-rate increases, you would expect gold to languish in those circumstances” (link)
  • RiverFront Investment Group ($5b): “They’re going to print money to ease the impact on the peripheral economies, which means further downside on the euro [currency] but upside for equity markets” (link)
  • Bessemer Trust: ($105b) “The risk of contagion to make it a European Lehman [Brothers] moment, is much, much smaller than a few years ago” (link)
  • Barclays: “The market has assessed that the risk of contagion from a Greek default is limited, more contained than in 2011 when Greece was last in the headlines” (link)

As an exercise, consider if just those four groups decided to use only 2% of the $281.7 billion they manage to short gold. That would total 145 tonnes of gold. Now estimate how many tonnes all those smallish coin dealers might have sold. Which do you think is bigger? With that sort of moneypower negative towards gold, central banks and bullion banks could easily sit on the sidelines.

As Gary Tanashian observes, “Gold is simply a marker, a barometer showing the state of confidence in the financial system and its managers (Central Banks) at any given time” and the quotes above show the confidence that professional money has in the system. It should therefore be no surprise then that Chinese bullion bank ICBC Standard Bank sees “scale up selling” on any rally in gold prices.

Are select central banks active in the gold market? Certainly, but market action is the result of many players reacting off each other and often engaging in narrative groupthink. Personally I think the mainstream professionals’ confidence is misplaced and they are complacent about Greece and how, as Ben Hunt puts it, we have “likely embarked on the death spiral phase of a game of Chicken” where “all sides begin to speak in terms of ‘having no choice’ but to take aggressive actions to defend their own interests.”