THINGS THAT MAKE YOU GO Hmmm...A walk around the fringes of finance By Grant Williams To learn more about Grant's new investment newsletter, Bull's Eye Investor, Click here » 20 January 2014 That Was The Weak That Worked: Part 3 "It was probably a mistake to allow gold to rise so high." – Paul Volcker © Copyright Mauldin Economics. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page. Hmmm...THINGS THAT MAKE YOU GO Contents THINGS THAT MAKE YOU GO HMMM... ....................................................3 Wealthy Foreigners Buy Up Swaths of UK Farmland and Country Estates ....................24 Manipulation of Gold by Central Banks Cannot Continue in 2014 ..............................26 EU Elections May Be "Tense" as Extremism Grows, Barroso Warns .............................28 British Exit from EU May Scare Off Foreign Investors, Admits Vince Cable ...................29 A Worrying Wobble ....................................................................................30 Greek Prosecutors Focus on Corruption at the Top ...............................................32 Rich Chinese Continue to Flee China ...............................................................33 Crisis Management: Europe Eyes Anglo-Saxon Model with Envy ................................34 Can Sino Iron Dig Out of Its Investment Hole? ....................................................35 CHARTS THAT MAKE YOU GO HMMM... ..................................................38 WORDS THAT MAKE YOU GO HMMM... ...................................................41 AND FINALLY... .............................................................................42 20 January 2014 2 Hmmm...THINGS THAT MAKE YOU GO Things That Make You Go Hmmm... "What a year this has been for gold. "The price of the yellow metal fell almost 30% from its peak at the end of August a year earlier, to bombed-out lows amidst a wall of selling which included several very sharp and somewhat counterintuitive selloffs, including violent plunges in both the April-May time frame and again into year-end. "Throughout the year, the spectre of manipulation was never far from the minds of all those involved in the gold market, whether they were crying 'foul' or asserting that, of course, there was no manipulation whatsoever and that those who suggested there might be were nothing more than conspiracy theorists, kooks, and whackos. "The main suspects at the heart of the conspiracy theories were, naturally, the bullion banks and the central banks. "The bullion banks, of course, have the eternal motive: profit; but what possible reason could central banks have for suppressing the price? None whatsoever, of course. The gold market is too small and too inconsequential for them to take an interest. "And yet, rumours abounded that the bullion banks were in dire trouble and that a rising gold price could send one or more of them over the edge and into insolvency as a scramble for physical metal exposed massive short positions that had grown out of a fractional-reserve-based lending system backed (if not explicitly, then certainly complicitly) by central banks..." Now THAT, you may well have thought, was the heart-racking, pulse-pounding introduction to my year-end look at the gold market. No preamble, no carefully constructed narrative to entice you into my latest little web, just BOOM! Straight into it. And every word of the above makes sense based upon what we've seen happen in the past twelve months in the topsy-turvy world of element 79, which holds down the spot in the periodic table just after platinum and just before mercury. 20 January 2014 3 Hmmm...THINGS THAT MAKE YOU GO But of course, nothing is what it seems when we are discussing gold. That quotation at the top is the intro to the year-end review of gold that I would have written in 1999 ... had I been doing such things back then. 2013 was, in many ways, a case of been there, done that; and to understand what is happening To receive Grant Williams' today, it is extremely instructive to go back to Things That Make You Go Hmmm... 1999 and reexamine some very strange goings- delivered to your inbox: on at the UK Treasury, AIG, Rothschild, Goldman Sachs, and Number 11 Downing Street. SUBSCRIBE NOW! (Cue dreamy harp music.) The chart of the gold price between February 1996 and August 1999 will look eerily familiar to anybody who follows the gold market closely; and for those who don't, just stick around and I'll show you what you've been missing. Gold Price (COMEX) In US$ 420 1996 - 1999 370 320 270 220 1996 1997 1998 1999 Source: Bloomberg After a run-up to a spike-high of $415.50 on February 2, 1996, gold began to fall. It fell fairly quickly at first, losing 3% in six trading sessions; and then the decline steadied for a while but remained consistent — until, around the end of the calendar year, gold suddenly and inexplicably spiked straight down. By the end of 1996, it had lost 11% of its value. As 1996 turned into 1997 the price continued to fall; and the new year saw several inexplicable downdrafts of considerable size and alarming speed which, by the time the dust had settled at midnight on December 31st, 1997, had cut the value of an ounce of gold by almost a quarter. 20 January 2014 4 Hmmm...THINGS THAT MAKE YOU GO Gold market watchers were baffled at the continued weakness in their beloved metal.They bemoaned their bad fortune and pleaded with the gods above, but neither activity made any difference — the price continued to fall. (Sound familiar?) 1998 was a fairly stable year, with the price moving little from January to December (though again, during the year there were several large falls in price that were hard to account for); and as the world entered the last year of the millennium, there was an air of stability around gold that gave hope to those battered by the consistent weakness in the gold price. (To reiterate, I am talking about the late 1990s here, NOT the last couple of years — just in case there was any confusion.) On the last day of 1998, gold closed at $288.25, down from $415.50 on February 2, 1996 — a fall of over 30% in three years. You ... yes, you with the glasses at the back... (muffled question) No, there is very little similarity to the 37% decline in the gold price from the August 2011 high to the close on December 31, 2013. (muffled question) What do I MEAN? Well, obviously, any similarity is completely coincidental because there were a number of strange things happening and rumours swirling back in 1998 about bullion banks being short gold in quantities that posed a risk to them and, of course, to "the system" — whatever THAT means — so those were once in a lifetime circumstances. (muffled retort) Well, yes, I suppose, now that you mention THAT, there MAY be some purely coincidental similarities between the two periods, but when you hear what happened next, you'll realize that the time I'm talking about was nothing like today, because the following year (1999) a certain central bank did something quite bizarre that led directly to sharply lower gold prices and a dramatic increase in specula... (muffled retort) ... oh look, stop it now. Keep your Bundesbank tale under your hat and we'll discuss it when I've finished. We need to get back to the main story. If I may? Thank you. 20 January 2014 5 Hmmm...THINGS THAT MAKE YOU GO So, as I was saying before I was rudely interrupted by young Eric there, 1999 dawned with an awful lot of antipathy towards gold after three years of poor performance. The rumour mill was operating overtime as speculation about large shorts in physical metal moved towards a crescendo, and a group of central bankers either dismissed accusations of any involvement in price suppression or refused to discuss it at all. The first five months of 1999 looked fairly familiar to anybody who happened to keep a watchful eye on the gold market. Gold Price (COMEX) In US$ January - May 1999 295 290 285 280 275 270 January February March April Source: Bloomberg After three poor years, gold was scratching around trying to find a bottom, and it looked like it was succeeding. The path of least resistance was clearly upward, and it looked for all the world as though a bounce was in the cards, since sellers had become exhausted. The gold price saw several quick spikes — all of which were followed immediately by sharp selloffs; but the net result was that on May 6, 1999, the gold price stood a fraction above where it had entered the year. It was at this point that things started to get screwy. The next day, May 7, 1999, then-Chancellor of the UK Exchequer, Gordon Brown, announced that he would sell almost 400 tons of Britain's gold reserves in a series of auctions over the subsequent three-year period. Dates of those auctions were to be set well in advance. Tense? 20 January 2014 6 Hmmm...THINGS THAT MAKE YOU GO No, I don't mean "Are you on the edge of your seat?" The "tense" I am questioning is that used by Brown in his announcement — it was, in this case, the future progressive. Ordinarily, when people like Brown make statements, they use a tense exclusively reserved for use by government officials and those heading up the world's major central banks: the future promissory. This tense is constructed by taking an intended possibility and removing the words we hope and pray from the beginning of the sentence and inserting the word will in the middle. Let me give you an example. When using the future promissory tense, the phrase "We hope and pray interest rates remain low until at least 2016" becomes: "Interest rates will remain low until 2016." Likewise, "We hope and pray we can unwind QE without any problems" becomes "We will unwind QE without any problems." Try it yourselves.