A commodity-trader good friend of mine makes use of a colourful little bit of slang to explain his conduct (and that of his dealer brethren) each time a big hedge fund finds itself trapped in a giant wrong-way guess on the markets…
He calls it “circling the whale.”
In keeping with my good friend, the wooden-ship whalers of the 18th and nineteenth centuries – having sunk an iron harpoon into some unlucky sperm whale – did not transfer in for the kill instantly. They knew it was in hassle – higher to do nothing, lie again and look ahead to the inevitable.
I believe the sharp decline in gold costs in latest days might have rather a lot much less to do with final week’s employment report, and much more to do with gold merchants “circling the whale” – Venezuela and its hoard of central financial institution bullion.
Bonfire of Bolivars
Bob Dylan as soon as wrote that “If you ain’t received nothin’ – you bought nothin’ to lose.” Nicely, Bob Dylan hasn’t been to Venezuela recently.
Attempt feeding your loved ones on a “nothin'” foreign money just like the bolivar when the estimated annual inflation price is someplace round 700% a yr, in accordance with non-public analysts akin to Johns Hopkins’ Steve Hanke. I say “estimated” as a result of the federal government of Victor Maduro stopped releasing inflation information many months in the past, for apparent causes.
The federal government additionally closely subsidizes gasoline and meals for its individuals. Plus there are sizable bond funds to worldwide collectors.
So worldwide reserves are already dropping quick – from $22 billion in January this yr, in accordance with information from Venezuela’s central financial institution, to $18 billion in Could, to new report lows of $14.8 billion initially of November.
This is the place the “circling the whale” half is available in…
In keeping with printed reviews, Venezuela has about $12 billion in bond funds due in 2016.
It may cowl these funds out of the $14.8 billion that it nonetheless has in reserves proper now. However this is the twist: Solely $3 billion of these reserves are liquid. The remainder?
It is all gold bullion, Venezuela’s crown jewels.
Gold and Falling Pianos
Consider Venezuela as a hedge fund, in want of money and sitting on a big “lengthy” place that is price much less and fewer by the month. Merchants can see this gold “whale” is in hassle, so that they grasp again and let it thrash. Why attempt to catch the proverbial falling knife (or gold piano)? And, in fact, the value of gold drops even additional.
And since I used to be the one who stated two weeks in the past that he believed gold had “nicely and really bottomed,” I will add that we do not know the timing of those gold gross sales. By the point the information is launched by Venezuela’s central financial institution, it is already many months previous.
With that in thoughts, the worst of Venezuela’s newest “gold dump” may already be over or near it.
For example, the World Gold Council’s information from late final yr confirmed Venezuela with 367 tons of gold reserves (down from a peak of just about 373 tons in 2011). By the beginning of this yr, that determine was reported right down to 361 tons.
So how far more gold has Venezuela offered in all of the months since?
We do not know for certain, however Bloomberg lately reported the worth of Venezuela’s gold reserves at $11.8 billion, based mostly on the newest information from Venezuela’s central financial institution. And the financial institution’s “newest information” is from Could of this yr.
How a lot gold does that greenback determine characterize?
If we use $1,266 an oz. – the common London Repair worth for gold in 2014 – then, as of Could, the central financial institution retained round 290 tons of gold in its vaults, by my guesstimate. Which might imply the financial institution offered down its gold holdings by as a lot as 70 tons by that point, price practically $3 billion.
And maybe not coincidentally, Bloomberg’s story on Venezuela’s gold gross sales got here out on October 28. That is the identical day that gold briefly popped by its 200-day shifting common at $1,180 an oz. earlier than plummeting beneath $1,100 in seven days’ time.
That is the form of exercise – the wholesale dumping of a giant place by a “market whale” at low costs – that is seen on the backside of markets.
All we have now to do is level to the UK, which dumped half its gold reserves between 1999 and 2002, with gold at its lowest costs in 20 years. And what occurred afterward? Gold went on to quintuple in worth to the 2011 peak.
A Nice Time of Purchase Low cost
As 2015 winds right down to an in depth, we’re confronted with a Fed trapped in an incredible interest-rate conundrum, and we’re seeing the early seeds of inflation beginning to sprout. The U.S. continues to be rising its debt hoard at an astounding price and the federal government has proven little to no real interest in paying it down.
All of which makes this a good time (and certain one of many final) to purchase gold, peace of thoughts and slightly insurance coverage in your different belongings at these nice costs. When the world is in turmoil, gold stays one of many final nice shops of worth.
And shopping for that insurance coverage low cost towards a wet day is rarely a nasty concept.