21 January 2009

Is Gold and the Balance of Power Shifting from the West to the East?

Here is an interesting set of charts, and a unique conclusion to match, from Moneyweek.

As we recall, the folks at GATA have been showing this sort of market analysis for some time now, to a cooler reception than a Madoff whistleblower at the Chris Cox retirement party.

We'd be open to hearing of other serious interpretations of this phenomenon. But be forewarned; to say it is just nonsense is, well, nonsense. It is a statistically valid hypothesis, albeit an unexplained and a bit odd, at least for the moment.

Can a money machine really exist in free and efficient markets? Economic theory says it cannot, that it must be due to some flaw or inefficiency, or an artificial scheme such as the regular returns from the Madoff Fund.

We might agree with the surmise that it involves the steady selling of leased gold from the West into the gold markets, but that could only be confirmed by an audit, and an admission from some large central bank that they have been obligating increasingly large amounts of their inventory into the public markets in a previously undisclosed manner.

The transaction costs are a problem if you are standing at the retail counter, we fear, so don't get any ideas about playing this trade. Its a sinecure for the big boys only, who can take advantage of market inefficiencies by trading in large, ever increasing volumes, like the whiz kids at LTCM did until they blew their trade book up.

Oddly enough, the data from the Office of the Comptroller of the Currency report on Derivates shows that only two banks, JPM and HSBC, are holding almost $124,000,000,000 in gold derivatives between them, approximately 98% of all gold derivatives in the world.

At $850 per ounce, that represents about 145,882,353 ounces of gold.

As the tides of monetary bubbles recede, curiosities are turning up on the beach every day.

Gold is shifting from West to East – along with the balance of power

By Dominic Frisby
Jan 21, 2009

Twice a day – at 10:30AM and 3PM - the price of gold is set on the London market by the five members of the London Gold Pool (HSBC, SocGen, Deutsche Bank, Scotia-Mocata and Barclays). This is known as the London fix and it's used as the benchmark to price gold, gold products and derivatives in markets around the world.

I've been looking at some charts and an astonishing pattern has become apparent. It's a pattern which, if you'd traded it methodically, would have earned you 1% a week over a period of 24 years. That compounds to a staggering 24,720,000%!

What is this spectacular strategy? Read on…

The astonishing pattern in London gold fixing

The strategy is really quite simple. You buy gold at the London PM fix (3PM), as the American markets have just opened for trading, and you sell your gold the following morning at the London AM fix (10:30AM), as the Asian markets are closing.

My thanks, as always, to Tom Fischer of Herriot Watt University for the charts below. The first demonstrates the weekly 1% gain that would have been yours since 1985 (the green line).

...What is more astonishing is how this pattern has accelerated since 2007. Sell gold in the morning, buy it back in the afternoon, and a cool 1.78% weekly profit will be yours:

Why would anyone want to manipulate the gold price?

What other free market shows such a consistent behaviour over time? Unless, of course, it's not a free market and the invisible hand of Big Brother is getting involved. Many of you will have read about manipulation of the gold price, and heard that there is a deliberate conspiracy to suppress the price of gold....

Rest of the story at MoneyWeek