WASHINGTON, April 23, 2013 — Earth Day* was yesterday according to our calendar. But Wall Street appears set to celebrate the spirit of Gaia this morning as futures point to a big market up move at the open. Maybe that’s because one of Mother Earth’s favorite metals has been catching a bid of late after last week’s destructive decline.
Here’s an interesting tidbit this morning from the always cynical (but often correct) ZeroHedge: “It appears Goldman (together with virtually everyone else focused on physical not paper gold) has bought enough gold from its clients. Now, there is only upside.”
Zero (aka Tyler Durden) then quotes Goldman’s actual missive to its investors:
“We have closed our recommendation to short COMEX Gold, as prices moved above the stop at $1,400/toz [troy ounce]. We have exited the trade significantly below our original target of $1,450/toz, for a potential gain of 10.4%. The move since initiation was surprisingly rapid, likely exacerbated by the break of well-flagged technical support levels. Our bias is to expect further declines in gold prices on the combination of continued ETF outflows as conviction in holding gold continues to wane as well as our economists’ forecast for a reacceleration in US growth later this year.”
Zero helpfully observes that this is likely a key reason why gold has at least slowed its long, vicious slide that began last fall and seems–at least for now–to have concluded last week with a swan dive of substantial proportions, as the yellow metal plummeted to its worst one-to-two-day loss in over 30 years. We well recall the last waterfall decline, which the Maven still remembers as what he then dubbed “Silver Thursday.” That was the day that Paul Volcker and the Fed pulled a few levers to jack the margin rate on silver from the usual roughly 10% up to 50% without apparent warning, destroying in minutes the Texas Hunt Brothers’ virtual corner on physical silver.
The Fed’s machinations, undertaken at the height of the Carter hyperinflation (which few these days seem to remember) caused silver, and to a lesser but still impressive extent gold, to do a screeching, Warner Brothers cartoon-style 180 in less than a New York minute.
After the Volcker move, the Hunts had to scramble to meet what may have been the most substantial single margin call the Maven had ever seen (although their holdings were spread over several brokerages). The Hunts, of course, could not come up with the funds, so massive was their previous leverage. As a consequence, their brokerages immediately commenced the most massive fire-sale ever of physical silver to meet the margin call. The white metal–which, as we recall, had stood at approximately $50-55 per ounce–left the airplane without a parachute or a backup. When all was said and done, in the twinkle of an eye (actually, a few days all told, but front-end loaded), silver had plunged down to the mid-teens.
The Maven remembers all this so well (except for the details around the edges) because those were the days when he himself was a fledgling retail broker. You watched this stuff happen on green-screen, CRT Quotron machine (how quaint), which rookie brokers had to share in a cubicle with three others. All of us wildly spun the turntable holding the single monitor round and round to catch up on the action as investors phoned in, panicking.
Alternatively, we could swivel around in our seats and watch the electronic ticker in the front of the office as quotes whipped by, each one worse than the next, as the market itself was severely affected by the action in silver, which spilled over into gold, which spilled over into everything else. Retail investors streamed in from the downtown Alexandria, Virginia streets outside to stare at the tape in horror, turning to one another to whisper street gossip, consternation, raw fear, and, among the older investors, recollections of 1929 as it if had happened just yesterday.
We rookies spun from the Quotrons to the tape. Most brokers in the late ’70s and early ’80s, even rookies, could read the tape quite well since it was useful in those days to memorize hundreds of symbols rather than having to look them up. TV’s Jim Cramer crows about how many symbols he still knows by heart, and it’s impressive. But the Maven likely remembers at least as many, and they were all going down on Silver Thursday. And he and his fellow rookies were breaking out in a cold sweat, figuring that the very next morning, we could very well be peddling five-cent apples (not the computer kind) on the corner of King and St. Asaph. Very scary.
But stuff like this can happen when any smart-ass entity (forgive the French), be it two greedy brothers or one really big greedy firm, gains entirely too much influence and control in the market, any market. In an interesting turn-of-last-century novel, Frank Norris’ The Pit, the novelist related the fictional tale of über-capitalist Curtis Jadwyn who eventually set out to corner the market in wheat.
To “corner” the market means to slowly, carefully, buy up so many futures contracts in a given commodity that you essentially end up owning perhaps 85-95% of the deliverable physical commodity. Which means, in turn, that anyone who needs or desires commodity X must buy it from you since you own it all. And, theoretically at least, since you’re the only dude in the driver’s seat, purchasers will have to pay you whatever the heck you decide they’re going to pay you. It’s a price fixer’s dream.
Well, Curtis Jadwyn cornered the market in physical wheat, all right. But he also encountered at that point the inflexible law of unforeseen consequences. Nobody at all was going to pay Jadwyn the outrageous price he demanded for wheat. Stuck with all the theoretical wheat in the theoretical world on margin, no less, Jadwyn reluctantly started lowering his asking price. Still no takers. You can probably see the end of this one coming. Like the Hunt Brothers in silver, Jadwyn was ruined in short order, destroyed by an extremity of greed.
Norris’ novel was, of course, a polemic against unbridled greed. But it was also, if indirectly, a treatise on how capitalism is supposed to actually work against the rich who get too big for their britches. But Norris’ novel took place in a Wall Street and in an America of over a century ago, before the Fed and before the IRS and the income tax even existed. As we see today, our current malefactors of great wealth are backed up by the Fed, and we are left to shift for ourselves as they use our money to dig out of the mess they’ve made.
Which gets us back to the real meaning of ZeroHedge’s interesting Goldman anecdote. Goldman had been happily shorting gold all the way down since last fall. Now that gold has reached its target price, it’s taken off the short and has broadcast that fact to the world. Likely last week, Goldman began once again to accumulate gold as it crashed and as margin calls were issued to the hapless hedge funds (Paulsen’s?) and saps who’d been buying it on margin figuring it would only go up again.
It’s perhaps not a coincidence that much of the American financial world today is run by Goldman alumni. So it’s not surprising that, thus far, this investing behemoth has been insulated from its trading sins throughout the duration of Great Depression II. Unlike the Hunts, who were wiped out on Silver Thursday, however, Goldman survives and prospers, oftentimes by misleading the markets as it did in 2007-2008. It’s a tribute to the power of crony capitalism, and the tentacles of Goldman, that nothing has been done, nor will be done, to rectify this glaring black hole in the regulatory system.
For you and the Maven–not much we can do about it except, perhaps, to start nibbling back into gold ETFs, cautiously looking over our shoulders for the next Goldman surprise, hoping we won’t be caught with our collective pants down around our collective ankles when it happens. It’s a real shame, and it shows you how corrupt our American systems have become.
With gold’s tone apparently improving, so is the market, at least short term. So we may have at least one more trading opportunity before “sell in May” takes full effect. There’s evidence that a lot of pros are already out, so we’ll likely take minimal advantage of any respite. But in the meantime, given the temporary halt in the drop of gold, companies and ETFs that deal in other metals and some commodities might get a lift, so let’s stay alert and aware.
The only exception to a possible improvement in the tone of metals and commodities is the price of oil which, after a months-long march upward based apparently on Middle East fears, West Texas crude, at least, is drifting downward rather nicely, with the U.S. apparently now awash in serial tsunamis of the black stuff rolling southward from the Bakken shale, the current Administration notwithstanding.
It’s supply and demand. Just as the Hunt Brothers and Curtis Jadwyn before them eventually learned. The only forces that can stop the laws of capitalist nature these days are a clueless Washington administration and Congress and a New York-based financial Godzilla whose alumni seem to control all the gates to the point where they may be able to nullify supply and demand.
Trade lightly today. Everything is suspect. Our shorts have mostly not worked well, given QE Infinity. And longs seem to be remarkably short-lived except for our great recent successes in the utilities. But it’s too close to May to take many risks.
Have a good one.
(UPDATE: Dow up over 100 points after the opening bell.)
*Cartoon by William Warren, courtesy NetRight Daily.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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