Gold Bullion: Something Big Just Happened in the Gold Market

Gold BullionThis Could Send Gold Bullion Prices Soaring

Keep your eyes on gold bullion prices. The launch of the SGE Gold Fix on April 19 may be the most significant event in the gold pits in the last 100 years.

This is because lately, the worldwide price of gold has been set by the bourses in London and New York, where mainly “paper gold” is traded.

For clarity, this means that for every ounce of physical gold bullion that changes hands, somewhere between 300 and 600 ounces of “paper gold” are traded. That is gold that does not actually exist in our physical universe but is created at the push of a button and then purchased or sold.

In fact, mainly sold. The prevailing thinking has been (and this is hard to verify because these two exchanges are both opaque and non-communicative) that this short-selling of paper gold in huge quantities (billions of dollars worth at a time, usually) has been the prime mover, among many, behind the strange behavior of gold during the 2011–2015 gold bear—and most especially during the April 2013 “gold smash.”

(A time when a horrified instructor at the Chicago Option Board, in a moment of anguish, penned that the “sigma” or probability matrix for the gold action that month was “about the same as the sun burning out.” (Source: “Gold and the Sun Burning Out,” CBOE, April 17, 2013.)

I have covered this topic in many prior essays for Profit Confidential. I have explained that central bankers hate gold for the same reason that tanning salons hate the sun. I have pointed out that these bourses, and their hangers-on, operate with immunity from prosecution because, according to laws on the books, transactions that support the paper dollar are protected under the aegis of national security and are considered, generally, good for whatever ails you.

I have suggested that if you really want to see all this imaginary paper gold, you need to hop onto your imaginary paper airplane and fly to the imaginary paper vault where these miscreants store it. I have also suggested this behavior is unnatural and abhorrent.

Seems I am not the only one with this point of view. The Chinese, who are very, very invested in using gold as a springboard to free themselves from the yoke of the USD—Pravda has unabashedly reported China has 20 times more gold than it admits to, at least!—seem to feel the same way.

Which is why on April 19 they launched their own version of the Gold Price Mechanism, a twice-daily fix based on real trading of real gold in the real world in real time.

The press releases from China all say that their spanking-new SGE Gold Fix should not really impact the price setting by the Western bourses. This is because the Chinese are nothing if not polite. My favorite release from the Chinese officials carefully explained that the Western gold price would not be affected because traders in the West “would still be asleep.”

If only. In the Comex session late in the day on April 20, gold was steady all day and then anonymous traders entered late in the session and slammed the price some $12.00 or so below the key technical level of $1,250. The chart suggests that the bid stack was simply overwhelmed, the same sort of “waterfall” pattern we have seen all through the gold bear.

However, going into the Asian market, the opening SGE Gold Fix reversed most of the Comex damage; and the closing SGE Gold Fix reversed all of the damage from the earlier smash.

Maybe I am reading too much into this? But maybe I am not. Remember: if arbittrageurs can make money by buying cheap in the West and selling dear in Asia, they will. And if New York or London should ever fail to deliver on gold allegedly sold at fair value, well, that would be the end of that particular bourse.

Which is why I think it is useful to track the SGE numbers—if you are an insomniac…or long gold.

If you want to follow the SGE Gold Fix, here is what you have to do:

The a.m. and p.m. SGE Gold Fixes are called the “benchmarks” and are found here. Next, go to Google and type in “yuan to USD,” which brings up the Google instant calculator. Type in the numbers from the SGE site you jotted down and let Google do the conversion to dollars for both numbers. Then take both of these numbers and multiply them by 31.1. You now have the SGE prices (a.m. and p.m.) converted to U.S. dollars per ounce.