Not surprisingly, one of the silliest explanations for last week’s sharp
decline in the gold price appeared in an article posted at the Zero Hedge web site. According to
this article, the only plausible explanation for the decline is rampant
manipulation while China’s markets were closed for the “Golden Week” public
holidays*.
In an effort to prove that manipulators in the West routinely take
advantage of China’s markets being closed to suppress the gold price, the
article includes charts covering the 2015 and 2014 “Golden Week” holiday
periods. These charts suggest that, as was the case this year, the gold price
tanked during each of the preceding two years when China was closed for
business. However, the charts are very misleading. Deliberately so, in my
opinion.
For example, the following chart from the article suggests that the gold
price plunged from the $1140s to around $1105 during the 2015 “Golden Week”
holidays and then quickly recouped its losses after China’s markets re-opened,
but that’s not the case. The “Golden Week” is from 1st to 7th October every
year, so what actually happened was that the gold price fell from the $1140′s
down to around $1115 during the days leading up to the 2015 “Golden Week”
(while China was open for business) and then rebounded to the $1140s while
China was on holiday.
During the 2014 “Golden Week” holiday period there was no net change in
the gold price.
The belief that manipulation is the be-all-and-end-all of the gold market
is based on two false premises. The first is that the fundamentals are always
gold-bullish. The second is that when financial markets are free from
manipulation they always move in concert with the fundamentals. If you hold
these two totally-wrong beliefs then every time there is a significant
decline in the gold price you will naturally conclude that manipulation was
the cause.
The reality is that gold’s true fundamentals have been deteriorating since
July and that the pace of deterioration picked up over the past three weeks.
At the same time, speculators in gold futures were adding to the risk of a
steep downward price adjustment by stubbornly maintaining an extremely high
net-long position.
The following chart compares the gold price with the bond/dollar ratio.
The fundamental deterioration and the delayed response of the gold market can
clearly be seen on this chart.
Gold market participants and observers who were looking at the right
indicators will not have been surprised by last week’s price decline.
*China is apparently the bastion of honest price discovery in the gold
market and corrupt Western bankers apparently wait for the Chinese to go on
vacation before launching their bear raids.
