German Regulars Probe Gold Silver Price Manipulation

(December 16, 2013 - by Nigam Arora)

There is no shortage of conspiracy theories related to gold and silver.  However, I have never found much credible substance in such theories.  For the first time in recent years, there is a report that is worth monitoring. 

German regulators are investigating Deutsche Bank regarding gold and silver price manipulation.  This is important because Deutsche Bank is one of only three banks involved in London silver fixing, and one of the five banks involved in London gold fixing.  HSBC and Bank of Nova Scotia are the other two banks that fix silver prices.  In addition to the foregoing names, Barclays and SocieteGenerale take part in gold fixing.

The London gold fixing has been a major determinate of gold prices since the end of the First World War. 

London is also the center of Libor interest rate fixing.  After regulators determined that the banks were illegally fixing interest rates, many major banks have paid hefty fines.

The results of the gold and silver probe are not known at this time.

Ignore The Conspiracies

Conspiracies are great for entertainment, but they do not help investors generate profits.   The reason is that conspiracies are backward looking, but markets are forward looking.  Even if it is found that there were problems with London gold and silver fixings, it will have no meaningful impact on prices going forward. 

Instead of focusing on conspiracy theories, investors should focus on the following three points.

Supply And Demand

In one respect, gold and silver are like other commodities in that they move based on supply and demand imbalances.

Traditionally supply has come from mines, recycling of old gold and silver, and selling by central banks.  Traditionally demand has come from use in jewelry, long-term investors seeking a portfolio hedge, gold bugs, and purchases by central banks that do not hold large quantities of gold. 

This time, there is a potential source of a huge supply never seen before.  The new source is the momo crowd.  The momo crowd is separate and distinct from gold bugs.  They bought gold aggressively simply because gold and silver were going up, their neighbors and friends were buying it, and they were scared about the policies of the Federal Reserve.  Unlike gold bugs, the momo crowd is not a traditional buyer of gold and silver. 

At The Arora Report, we have developed algorithms that monitor gold and silver trading across the world and attempt to decipher buying and selling by different types of investors.  Our algorithms can detect buying and selling by the momo crowd but have no way of predicting what the momo crowd will do in the future.

The momo crowd is new to the game, is holding large quantities of gold and silver, and there is no precedence to guide us about their potential behavior.  The chart shows how low gold can fall if the momo crowd panics and sells. 

As the chart shows, gold has reached our Fibonacci target for this correction. Many of our indicators are showing a bottoming process in gold and silver.  If it was not for our inability to predict the behavior the momo crowd with any degree of confidence, our algorithms would have given a buy signal on gold and silver at this time and we would have upgraded gold and silver to a strong buy in various time frames. Please see below for current ratings taking into account the best estimates of the momo crowd’s potential behavior.

Geopolitics

For thousands of years, gold has been a hedge against geopolitical troubles.  In our view, nothing has changed and gold will continue to be a hedge against war and instability.

For the time being, the world is getting better.  Iran and the U. S. are talking.  The U. S. has backed away from bombing Syria.  North Korea is busy with its internal power struggle.  The debt crisis in Europe is under control. 

It does not take much for new crisis to erupt.  Investors may want to keep a close eye on how gold behaves during a crisis in the future.

Inflation

For thousands of years, gold has been a hedge against inflation.  We see no reason why this will change. 

Right now, inflation is under control in the U. S. and Europe.  Japan is barely succeeding at fighting deflation.  There is inflation in emerging markets such as India and Brazil.  For the time being, gold is taking its cue mainly from the inflation data in the U. S.  

Investors may want to keep an eye on the Core Producer Price Index which is released by the U. S. government every month.  The theory is that inflation shows up in producer prices before it shows up in consumer prices.

What To Do Now?

At this time, certain closed end funds and precious metal miners offer better risk reward opportunities than the bullion.

The smart money knows that the momo crowd is sitting on large unrealized losses in gold and silver.  The long-term chart shows the zone where a vast majority of the buying was done by the momo crowd. The smart money also knows that there is only so much pain the momo crowd can take.  For this reason, every time gold raises its head, the smart money sells. 

Here are our current ratings on gold and silver.  These ratings are determined by the same algorithms that gave a signal to buy gold aggressively in $600s, sell half of the gold at $1,904 and the rest at $1,757; these algorithms also gave a signal to buy silver in $17s and sell the position in the zone of $48 - $50, and then gave a signal to sell silver short around $50 predicting a 33% drop in a short time. 

• Negative in the very, very short-term.   
• Positive in the very short-term.
• Neutral in the short-term.  
• Negative in the medium-term.
• Negative in the long-term.
• Positive in the very long-term.

These ratings are extensively used by bullion dealers across the globe.

The momo crowd has made gold and silver markets very volatile.  For this reason the ratings above are not cast in stone and are subject to frequent changes.

These ratings are reviewed daily and changed frequently to help both long-term investors and short-term traders.

Full Disclosure: Subscribers to The Arora Report may be long or buy certain precious metal miners and closed end funds.

By Nigam Arora
Chief Investment Officer
Courtesy of www.TheAroraReport.com