April 18, 2013; Record Gold Sell-off, How and Why

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, I know we have a lot of regular listeners, but I know why some of the non-regular listeners are listening today. There is fear, a little bit of trepidation, in the gold investor’s mind right now because they just got whacked, Friday and Monday, the last couple of days of trading.

David: And it’s understandable, because the offered explanations really are not adequate. What happened, why did it happen, was there a trigger event? These are the kinds of questions that people are reasonably wanting an answer to, and in all reality, there is no reason. It happened because it can happen. It happened because it did happen. (laughter)

Kevin: Wait, so the reports that I’m reading that inflation may be dropping, that we may be going into a deflation – in fact, I heard an interview with you on CNBC last night, and these guys were saying, “Well, you know, J.P. Morgan has come out and said, inflation is no longer an issue, that worldwide it is a little over 2%,” and you had an interesting answer for the national audience.

David: Well, the reality is, we have had inflation statistics in decline over the last 12 months, on a global basis, but what we would suggest is looking forward to the consequences of massive money-printing, by the Fed, the ECB, and the bank of Japan, it is inevitable to see a real inflationary impact in the future. That’s how investors should be thinking – looking on the horizon, not looking in the rear view mirror. Looking on the horizon, what do we see as a consequence of current policies and procedures by the world’s central banks?

Kevin: Of Japan doubling their money supply in two years? That’s what Abe said. We talked about that last week.

David: And of course, we have the negative gold argument being proffered by Societe Generale and Goldman-Sachs, on the basis of an improvement in global growth here in the Unites States. Apparently, we didn’t get the memo, that in fact, the U.S. is in a new growth trend, and we are going to see the Fed start to increase interest rates. Maybe they didn’t get the memo, that if you do, in fact, increase interest rates, even 1%, that is an extra 165-185 billion dollars in interest payments on the national debt.

The question is, can they increase interest rates? And I think the reality is that no, they cannot, therefore they will not. That is something that, if it happens, will be determined by the market, in the bond market, by the long end of the curve. Investors who are saying, we’re not receiving adequate compensation for the inflation risk we have in our fixed income portfolio, which just goes to the point of, yes, Jeffrey Gundlach was correct, Bill Gross was correct in recommending gold and silver earlier this year. Bill Gross came out in what some thought was a retraction in his Twitter account. He said, “I’m a bond guy.”

Kevin: The bond guy, not the gold guy.

David: And he said, “I made a mistake.” This was in reference to his top recommendation for 2013, gold, specifically GLD, owning that for 2013. “I made a mistake.” And if you go on to read the rest of the twitter, of course they are very, very short, brief explanations, “I would still buy gold here. We see reflation.”

So there is this idea that yes, of course, we see inflation on the horizon. Yes, of course, anyone with their brain engaged with that is happening in the world today would say, “These radical monetary measures are not benign in their consequence.” They are not benign in their consequence and they are not going away.

This last week we had Chinese growth which was slowing. It was still above the official target of 7.5%. They came in at 7.7%, but the market was expecting 8.1 to 8.2%. On top of that, we have the IMF slashing global GDP expectations. They were saying, “We’re going to see growth of 3.6%.” Now they are downgrading that to 3.3%. The basis for the slaughter in the metals market, which really has no basis, and we will get into that – it’s not there. We don’t have global growth, we don’t have a disinflationary environment, in terms of the central bank’s activities, so the things that have been offered as explanations for why you should either be short gold, or out of the gold market – they don’t hold water at all.

Kevin: Why don’t we just talk about the dirty money, then, because that’s really what we’re getting at, rather than talking about inflation, because inflation is higher than what they tell us. They have to manipulate that. Granted, you are going to have guys out there writing about these massive deflationary events and that is why gold is going down, but the bottom line is, this thing was manipulated. Even the Fed minutes were sent out to only a few very important people.

David: If you’re talking dirty, why is there no more comment on this? Why is this being left alone? Somebody accidentally sent it, a day early? The Fed minutes go to a VIP list one day early? Well, aren’t they special? What does it take to be on that list?

Kevin: That’s what Martha Stewart went to jail for. It was insider trading.

David: (laughter) A promise to participate in market operations if they are called to do so. I think that’s really what makes you special – if you will be complicit with the Fed’s market activities, or the President’s…

Kevin: We’ll throw you a bone.

David: We’ll throw you a bone, and you will have your information, whether it’s a few minutes early, or a few hours early. I’d like to know what positions were taken by every one of those firms, in light of having the Fed minutes early. And frankly, if they do get it early, even by a few minutes, I’d like to know what proprietary models they put into play, and what positions they take in light of that. It is, strictly speaking, illegal. It is, strictly speaking, immoral. It is, strictly speaking, something that someone should be tarred and feathered for. And yet, we have to move on to more important things. There are other issues in the news, and we have forgotten about it already.

Kevin: David, for the person who is listening who just got thwacked in the gold market, they are watching their gold go down, explain a little bit about what happened on Friday, and then subsequently, Monday.

David: What was the difference between Thursday and Friday? Friday, April 12th was a very interesting morning, to say the least. The New York markets opened and we had a 100-ton order, that is, 3.4 million ounces, which was being sold. Of course, this was not physical gold that was being sold, this was the June futures contract.

Kevin: It’s in paper.

David: This is strictly paper – the futures contract world. It was only a couple of hours later that Merrill Lynch was facilitating a 300-ton liquidation, again, not of physical metals.

Kevin: In one day. That’s more than a lot of central banks would sell in a year.

David: Sure, and actually, we had an accumulation of 534 tons of gold by the world central bankers, and that’s an aggressive purchasing plan. You are reversing what used to be – and remember, we had the gold agreement in Europe where they would not exceed a liquidation of 400 tons in a given year.

Kevin: And this happened with two brokerages in one day.

David: And again, it’s all in the paper market. The futures contracts were very active. This is sort of the shock and awe of liquidations, of future liquidation, 400 tons, and of course, that continued to snowball from there. But it is unprecedented in terms of its volumes. Actually, you could see those same volumes in the capitulative phase in 2008, so we have seen these kinds of volumes. Of course, they were eclipsed on Monday, where you have even more selling pressure come into the market, but it was a combination, by the time you got to Monday, of panic selling in the exchange-traded products and panic selling, and margin call required selling on the futures contracts yet again.

Kevin: But this could have been set up by just a few individuals, so Dave, let me ask you, how does a gold sell-off work? How do they maneuver this thing to work so effectively?

David: This applies to any trade of size. You are talking about institutional energies here, but I think gold is particularly relevant in the light of last week’s volatility. How does this happen? How do you make a trade like this happen? First, you have an idea, and it doesn’t have to reflect reality. But, it is an idea of a trade that will be profitable. Let’s illustrate this with a fictional trading firm. We’ll call them BS.

Kevin: Dave, we don’t use that kind of language on this show.

David: Oh, I meant Buffalo Stampede. BS stands for Buffalo Stampede in my book. This Firm, GS … BS … you can either be short or long. You can either be a seller, or you can be a buyer. That’s how I’m using those terms.

Kevin: You can either be a buyer or a seller, long or short.

David: Exactly. Secondly, you determine what resources you have to implement the trade. You may have to gain approval from the upstairs room, but you have to gain approval, unless you are a veteran trader, some sort of a whale, like we’ve seen the “London whale” who was large enough, had his own P&L, and could move the markets.

Kevin: What is a P&L?

David: A profit and loss statement, in which you basically get to determine, with a set amount of money – let’s say that you are given 500 million dollars to trade, or 3 billion dollars to trade, or 5 billion dollars to trade. However, much money the firm in question has given you to trade, you can trade, and you have to report how much money you are making or losing at the close of each business day.

The first thing you do is to come up with an idea. The second thing you do is determine what resources you have to implement that idea, in which case you have to check in with risk managers and make sure you have approval to move forward. But keep in mind, risk managers in this day and age, and certainly over the last ten years this has been very well documented, they kind of lie in the shadows, because they don’t really add anything to company profits. These are your no men. Not your yes men, your no men. So you try to keep them busy looking at models and making sure the firm is not out of whack in terms of their value at risk, and things like this.

Kevin: While you’re out working the deal.

David: Yes, but you don’t want them to look too closely at your ideas, because they might scuttle your best ideas, saying there is too much risk involved. That’s part 1 and part 2. Part 3: Once you have mapped out the implementation of your idea and you know what resources you are dealing with, now you do your best to determine who might take the other side of the trade. Is it one party? Is it more than one party? Do you know them? You might even know them personally. What are the companies like that they work for? How much of a leash do they operate with? You are sussing out who is going to take the other side of the trade. Once you determine who would be on the other side of the trade, you need to estimate, you need to calculate, the resources they have to work with.

Kevin: So the question is, how deep are their pockets? How much do they have to work with?

David: And this is the most vital step, because, while ego does matter, and of course, we are talking about a fictitious firm here, BS certainly has a lot of ego, what you have to figure out is if you are going to be able to spend more than the next guy, or the next two guys, and everybody has access to cheap money. The question is, is their firm going to give them enough leash to continue trading against you? How deep are their pockets? How deep are your pockets? Can you outspend them?

Then the contest begins. Here is where the trade actually begins to get played out. The contest begins to see how committed the other side is to their trade. In this case, BS has the idea of selling an asset short.

Kevin: Selling short, David. That is profiting from a decline in price. Basically, what you are doing is betting that something is going to go down.

David: Yes. Then the other side of the trade is, of course, any or all parties that are long.

Kevin: Which is buying long.

David: Only asset outright, and they are operating with the thesis that prices will rise. Volatility is sometimes sufficient to break down the other side, simply by breaking down their nerves, causing the other side to question their rationale. Why, in fact, did they put on the trade? Why do they own the asset in the first place?

But other times it’s just a matter of spending to the point that the other side capitulates because they are out of resources.

Kevin: It reminds you a lot of a poker game. It’s like everybody is sitting there holding the cards, but people start to get nervous when the pile is getting to be deep.

David: And this is a particularly quick process when someone is using leverage. A leveraged long position is an easy one to break down, because if your equity in the trade is 10-20%, then a limited amount of volatility will cause voluntary capitulation – you are out of money a lot quicker. Not only do you not have deep pockets, you had a large trade but you only had a little bit of equity, your equity gets squeezed fast.

Kevin: Let me get this right then. Let’s say that you buy a trade of 100 of something, but you only have to put 10 down, in other words, 10 for 100.

David: Right, so a volatility of 10% wipes you out completely if you’ve got money in the trade, as opposed to someone who has no leverage in the trade, and they are going to chew through that equity a lot slower. That’s voluntary capitulation. You also have the involuntary capitulation, which is margin calls.

Kevin: So when you are out of that 10, somebody calls you up and they say, “Hey, we need another 10 or we’re going to blow the whole thing out.”

David: Exactly. So when you have outspent your trade opposition, they now have to reverse their side, and undo the trades that were put on against you. Does this make sense? They have to purge their position and prices begin to roll downhill for a change. Now gravity is your friend, and you have, in that context, a lot of unsuspecting players, with insignificant positions in terms of size, relatively speaking, and they are faced with this sort of steamroller apparently coming from nowhere. What is the reason for the decline? What was the trigger? These are very reasonable questions that people are asking in the context of a price avalanche. What they don’t know is that this was an idea probably hatched 30 days ago by a bunch of guys who just quit using pimple cream. You are trying to look for a rationale, you are trying to figure out what just happened, because as a long-holder, in this case, of gold, how is the market moving against me? I thought I had a fundamental rationale for owning it.

Kevin: But you had no idea that one of the brokerages was going to start the day with a 100-ton sale trade, (laughter) and another broker was just going to come in 300 tons more.

David: So for these unsuspecting speculators, you can’t, in many instances, have a defensive sell stop in position, in place, to prevent losses. What this represents is a subjective degree of pain that an individual speculator is willing to experience. You own your position here, and you are willing to see, say, 10% volatility, the downside at that point – boom, I’m out. You have a sell stop…

Kevin: It’s not a bad technique if you are trying to protect a portfolio, but when it is being manipulated, it can actually add to the manipulation, can’t it?

David: It’s not out of the question that you may be able to see where these sell stops, in fact, are positioned, or, at a minimum, assess the critical price points implied in the options market, which would let you know where you are likely to pick up more of an avalanche of liquidations. If I’m putting on this trade of pushing prices lower, shorting the market…

Kevin: You know how far to push it.

David: I know how far to push it, and I also know where I’m going to see extra gravity, if you will, applied to the market, taking out those prices one at a time. As a major position is being unwound, there is no degree of small investors in cumulative efforts which can offset this sort of selling volume, so your sell stops add to the downside momentum. The challenge, here, is for any small speculator or investor, who is generally, frankly, undercapitalized.

Kevin: They don’t have the free Fed money.

David: Sure. If you put your life savings in 10 krugerrands, you are up against borrowed funds that are short a leveraged position in the June contracts, and you are now dealing with an avalanche of 100 tons, and the next thing you know, 300 tons in additional selling. (laughter) It’s spectacular!

Kevin: I could do well with free money, myself.

David: Well, the games you would play, and the plans that you could concoct, over cocktails, discussing what is possible with free money. This is the challenge. When you look at the Fed, and you look at the damage that is done by the Fed, keeping rates as low as they have, you turn the financial markets into a casino for private P&Ls. We are talking about bank P&Ls, bullion bank P&Ls, hedge fund P&Ls. This becomes a casino world when you are dealing with free money.

Kevin: And let’s talk about the emotional impact that it causes to the guy who is not in the game. You have guys who just went out and said, “You know, gold seems like a pretty good investment.” In fact, I had just read that the long contracts on gold since the Cypress thing had really increased, so you had a lot of guys going long right after the Cypress thing.

David: But on leverage.

Kevin: On leverage, but they weren’t part of this VIP crowd. They were not at the cocktail party, Dave, that you are talking about.

David: They didn’t get the Fed minutes a day early.

Kevin: No, but their emotions skyrocketed when that happened. They had to make a decision.

David: And I think what you are really dealing with, not only with a long investor, a small speculator, if you will, who is undercapitalized relative to this sort of deluge of money coming south, you also have a group that is, in some instances, unfortified emotionally. I’m talking about the folks who have been taken out of their positions by their stop loss orders, emotionally unfortified to re-establish those positions at better prices. In the office many years ago we read Jason Zweig’s book, Your Money and Your Brain.

Kevin: It was a good book.

David: It helps you explore who you are as an investor, to frankly determine whether or not you are even qualified to be an investor. In some instances, you are better served just going out and spending your hard-earned cash following the Keynesian model and just blowing it, because honestly, you don’t have the fortitude to figure out what makes a good trade and stick with it. What Jason Zweig describes is a lizard brain response. You are in a fight or flight mode, you are in a survival mode, if you have seen some losses. Now you have to cut your losses and run, because absolutely, you can’t suffer 100% loss.

Kevin: And we see the words, panic selling. When there is panic selling or something like that, that is that lizard brain in complete effect.

David: And that’s what we had on Monday. It was utter panic selling, added to this manipulative theme of short selling. So your small players are taken out of the market. The market offers no logic for why their positions needed to be sold out from under them, and this adds to the confusion of whether or not they should step back in, so you have this hesitation. People who like the theme want to own the asset, but now are hesitating, because they don’t understand why they were taken out of the position in the first place.

Kevin: And the other thing, too – what causes doubt after the panic is that they see reputable newspapers and reputable publications, and “reputable” people, billionaires, coming out and saying, “Gold is horrible, it’s gone down. This is the end of the gold bull market.” We are talking about the Wall Street Journal, or you name it.

David: Here is the issue: If you were looking at a percentage of positive versus negative press for gold over the last 30-60 days, you would say to yourself, just being a reasonable person, “If the news is 95-98% negative, there is barely a sliver around this cloud, where is the silver lining?” It doesn’t exist anymore. Why do you own gold and silver? You shouldn’t. Literally, the onslaught over the last 60 days has been this barrage of negativity.

Let’s go back to the 1920s. Add to this context of short selling of an avalanche of panic selling on top of the short selling, a trick that was used in the 1920s to manipulate the market to extremes. Stock operators would regularly send a cash envelope to their favorite newspaper jockey, and all they would do is suggest the reasons for a particular investment, whether it was going to be a winner or a loser, and here are your bullet points for the article, and then, from that point forward, the print drove the trend, or at least served to support the trend, as the man on the street who was naively reading the rag as somehow insightful, or objectively written, not realizing there was an agenda behind it.

So you have manipulation of price in the short run, and believe it or not, this kind of manipulation is as old as the markets, themselves. Thousands of years of, if you can suggest, if you can seed the idea a little bit, if you can get the ball rolling. Yes, it’s a PR blitz that complements a trade book.

What I mean by a trade book is somebody has taken a position, whether it is short or long, whether they are buying the asset or selling it short. This PR blitz, frankly, if you investigated it properly you would find impropriety, but very rarely are you going to see an investigation happen here. But fortunes were made in the 1920s by speculators scalping the market via what we would consider a gross manipulation of the public trust. You assume if you read something in an established paper, that there is no chicanery behind it, that there is no hidden agenda. And frankly, there are no cash envelopes, or extravagant VIP events that newspaper writers are invited to, where over champagne, cocktails, canapés, they are influenced or being encouraged to write in a certain way.

What I am saying is, as an investor, you really have to do your own thinking. Step outside of the mainstream media and question whether or not your reading doesn’t have an agenda behind it.

Kevin: Also Dave, let’s go back and look at what happened. You have a coordinated effort to short the market. So we see it coming from the trade and you explained the dynamics of how that works. Then you have the press somewhat in concert with that at the same time. But now you have the commodities exchanges, themselves, the guys who are actually supposed to be objective players, just making sure that they are watching the buyers and sellers and making sure that they behave, and it seems to me like they, also, were part of this coordination, as well.

David: Well, now they are. This saga starts April 10th, maybe April 9th, with the pre-released Fed minutes. The pre-released Fed minutes lead to some controversy. Of course, there is also the issue of if Cypress is going to sell their gold, and then just a day later, the Cypriot government says, “You know, you are saying we are having this conversation, or we are in negotiations. What meeting was that? Where was it? Because I don’t think we were invited, and we didn’t say we were going to. What are you talking about?”

And then, the very next day, April 10th, Goldman-Sachs – it’s not only that they turned bearish on gold, but they said, “We are short gold and have recommended that our clients do the same. When did they amass a huge short position on gold? Was it that day? Was it the day after? I think they’ve been amassing a short position for some time.

I’m not saying there was a cash envelope passed, clearly there is no evidence of that, but you have a very accommodative press saying, “Yep, listen, now it’s time to not sell gold, but to sell it short. We want a profit on the downside, and we, Goldman-Sachs, one of the most important investment banks, and investment managers in the world, are going to profit from your losses if you want to step in on the other side of that trade. We have Fed backing. We’re going to push this as far as we possibly can.” Read between the lines what it means for Goldman-Sachs to say, “We are a short seller of gold. Get out of our way. The avalanche will begin this week.” This is what you have between the lines.

Now, fast forward to this week, what you were just saying with the CME. This is astounding to me. Effective Tuesday of this week, in light of the collapse in gold and silver prices, the CME is raising margin requirements on gold, silver, platinum, palladium and natural gas.

Kevin: Which is going to force more of those guys who were trying to hold on with one hand, they have both hands on it now, and now they have to release it because the CME is coming and saying, “We need more money for you to hold that contract.”

David: “If you want to have a long position in gold, you are going to have to put some more money down.” As we have noted before, when the CME is doing their job – a little like the Fed, this rarely happens, I suppose you know about that – they should raise margin requirements as prices rise in order to maintain an orderly trading market, and to ensure that speculators keep adequate skin in the game. We’ve talked about this at least three or four times, in which, if you want to know the CME’s position on something, or who they are in cahoots with, when are they doing their job?

They should have, in the spring of 2011, raised margin requirements aggressively as silver moved from $19 to $49 an ounce. As it was, they moved margin requirements more than 7 times from $49 back down in price, adding downside pressure, and really communicating to the market, “We will teach you a lesson. We will let you know what we think of gold and silver being delivered off the exchange, of higher prices of the metals. We will let you know how we intend to play the game.”

Just understand, the CME is communicating, this week, their position on higher gold and silver prices, and their position in terms of, “Yes, we’ll change the rules in the middle of the game, not when we are supposed to, but when it is convenient to our positions or the positions of our friends.” This is what is driving me crazy. Raising margin requirements in a falling market is the simplest way of throwing your weight onto the short side.

Kevin: That sounds dirty, as well.

David: It communicates, not so subtly, that you are in league with the operators driving the price down. That’s the reality. The futures market is a rigged game. It’s for insiders and the exchange, itself. We are facing a scenario, or have been, over the last several months, where, with more stocks of gold and silver being taken off the exchange, it is not far to imagine that trend continuing and bringing about force majeure, where essentially, the exchange is unable to deliver physical metals, and has to settle their transactions in cash. You are really talking about the CME being put in an uncomfortable position, and now pushing back.

Kevin: It is interesting, too, Dave, everything you have been talking about up to this point still involves the paper markets, because, at the same time that this was occurring over the last couple of weeks, we have seen the actual physical stores of metals, at the depositories, reducing. They are coming down. They started falling. People who are actually dealing with physical metal are still buying it. It’s like they are un-phased.

David: Kevin, I didn’t go to sleep on Sunday night.

Kevin: I’ll bet.

David: Watching the markets as they opened, we had reasonably strong physical demand in Australia, and then as we transitioned to Hong Kong trade, we had a major bullion bank step in, and without a recapture of $1500 on the upside, that bullion bank began to sell heavily.

Kevin: Trying to keep it from going above $1500.

David: This is where, we come to this week, and we have the CME colluding with BS traders, driving the price down, limiting the amount of metals that can be delivered off the exchange, discouraging that by driving the price down.

Kevin: And we have a puppet press.

David: And then you have the puppet press participating and helping create an atmosphere of negativity. Frankly, the article that the Wall Street Journal wrote last week, and then again, I’ll have you know, there is a second article, April 16thWall Street Journal, Goldman-Sachs, and how does the headline read? “Keep shorting gold.” It is amazing, if you looked at April 16th and the trade in gold, of course you began to see a bit of a bounce in price, and this is in overseas trade.

Kevin: So what they are saying is, “We haven’t made enough, keep shorting gold.”

David: And by the time the Wall Street Journal is printed and out the door, I think Goldman-Sachs realizes that they are losing some steam, and that they need to, or would like to, see a little bit more momentum on the downside. They haven’t closed out their position yet, and of course, when you close out a short position, you have to buy back the asset in question, and that forces the price higher. We haven’t seen short-covering to any degree yet. We haven’t seen a Goldman-Sachs cover. I’d love to participate in seeing them cover.

Kevin: Wouldn’t it be fun if everybody went in and bought gold to the point that Goldman-Sachs actually lost on a trade and they had to go cover that position?

David: If the Wall Street Journal was printing articles about the stock market, and a major Wall Street firm was shorting the daylights out of the S&P 500, or the Dow, or the NASDAQ, do you know what you would have? You would have a string of lawsuits and cease and desists from the New York Stock Exchange, from a number of pension funds and asset managers, which raises the question. Has Goldman-Sachs offered adequate disclosures? Has the Wall Street Journal calculated the risk that they have taken on in pimping Goldman-Sachs’ trade book?

As if last Wednesday’s Wall Street Journal article wasn’t suspicious enough, with the “We are recommending shorting gold today,” we have this follow-on article Tuesday, Wall Street Journal, saying, “Keep shorting the metals.” And then on top of that, think of the coincidence. Tuesday, Goldman-Sachs says keep shorting the metals, and effective at the end of the day, on Tuesday, is the CME’s implementation of higher margin requirements, essentially gutting the longs. Is it mere coincidence that the CME raises margin requirements in a supportive manner for two of Goldman-Sachs’ largest positions? Come on, this is mind-boggling.

Kevin: No, these trades are in play right now, and they are helping them along, pushing them down.

David: I think this important to understand. This is an orchestrated move. This has nothing to do with the fundamentals. If you look at why you should own gold, those reasons still exist. Is Europe in any better position this week than it was a week ago or ten days ago? Do you we have any less threat of currency devaluation? Do we see weaker growth, or do we see, in fact, a resurgence of real growth in the global economy?

When you stack the macro-fundamental case for why you own gold, none of those variables have changed. What you just witnessed is a classic capitulation in price where two firms, whatever firms they were, were pitted against each other. One was forced to fold its position. The short side won, the long side folded. Anyone who was leveraged in the gold positions that they held has been crushed, stop loss orders have cascaded, and now you have gold owners asking a very reasonable question: What just happened? How can this happen? This doesn’t make any sense.

Hopefully, what we have just discussed at least explains how it happens. Why? Because it can. Why: Because it happens all the time. This is the way a trade desk operates. This is the way an individual hedge fund or market operator has always operated, perhaps on a smaller scale, and perhaps less in your purview, but this is exactly how it happens.

Kevin: And David, you have to figure that the people who are printing money right now, this doesn’t hurt their feelings a bit, even if they weren’t in cahoots with Goldman-Sachs or J.P. Morgan…

David: Just providing the cheap capital, but they’re not in cahoots, they just provided the cheap capital.

Kevin: Right, and they just let things go on their own. But I think we should probably differentiate this now, because you have been talking about the paper markets, but we know there has been physical buying. In fact, here at this firm, I was really proud of our clients. Talking to them yesterday and the day before, I haven’t had a single sell trade yet. I haven’t had one client sell because of what happened.

David: And I would say, on balance, the purchases to liquidations have been…

Kevin: 5 or 6-to-1.

David: Easily.

Kevin: Yes.

David: With most of the liquidations being a few thousand dollars here and there, where people are basically trying to pay their bills, and we have seen that as an ongoing event for the last 24 months, as people are dealing with a real-world economy that is in the toilet.

Kevin: And that differentiates a physical loner versus somebody on margin. If you are out there betting the farm on gold going up, or gold going down, and it has a little volatility and you get washed out, you get wiped out, I mean, it’s gone. But if you own gold and it goes down a couple of hundred dollars, you still own gold.

David: What is the ultimately low side for gold? That’s a very good question, because with a game like this, Goldman-Sachs saying, “yes, keep shorting the metals,” I think we may have already hit the low, in which case, they are going to fight like mad to try to try to push prices lower, and it will be to no effect.

But what you could see, the technical levels of $1325, $1310, $1300, $1285, $1250, there are a variety of estimates out there from Credit Suisse, Morgan Stanley, Coutts Bank, anywhere from $1350 down to $1250.

Any of these can represent a turning point, and I say a turning point because when you short the market, you ultimately have to step back in, cover those short positions, which in essence you are buying. The same amount that you were shorting, you now have to step into the market and buy those assets. Well, that can happen at any time. Massive buying, I think, will likely come back into the market on the basis of short-covering.

That will happen, and will happen shortly. But what we will see is massive buying with constructive interests above $1525, want to see a little bit of stabilization in the market.

Meanwhile, we see sophisticated investors all over the world stepping in, buying physicals, taking physical delivery, millions of dollars at a time. Why? Because $1375 makes sense to them. It is something of a gift because, for the long-term owner, the merits of gold ownership haven’t changed. They’ve only been reinforced in the last few weeks.

The message we should be sending should not be one of anger or frustration with market manipulation. We should be sending a thank you note.

Kevin: Arigatou, thank you very much, like you said last week.

David: We should be sending a thank you note to Goldman, and Merrill, and the other stock market and gold market operators who have given us this opportunity. If we see sub $1400 – well, we did. If we see sub $1300 – unlikely, but if we do, let’s send a thank you, because these will be the lowest prices we see, perhaps in our lifetime.

And who knows that that one ounce, 10 ounces, 100 ounces, 1000 ounces, that you purchase over the next several weeks, isn’t the trigger point for the short-covering, and the recovery, that we see in the price of gold?