A commodity-trader friend of mine uses a colourful little bit of slang to explain his behavior (and that of his trader brethren) whenever an outsized hedge fund finds itself trapped during a big wrong-way back the markets…
He calls it “circling the whale.”
According to my friend, the wooden-ship whalers of the 18th and 19th centuries – having sunk an iron harpoon into some unfortunate cachalot – didn’t move certain the kill immediately. They knew it had been in trouble – better to try to to nothing, lie back and await the inevitable.
I think the sharp decline in gold prices in recent days may have tons less to try to to with last week’s employment report, and tons more to try to to with gold traders “circling the whale” – Venezuela and its hoard of financial institution bullion.
Bonfire of Bolivars
Bob Dylan once wrote that “When you ain’t got nothin’ – you bought nothin’ to lose.” Well, Dylan hasn’t been to Venezuela lately.
Try feeding your family on a “nothin'” currency just like the bolivar when the estimated annual rate of inflation is somewhere around 700% a year, consistent with private analysts like Johns Hopkins’ Steve Hanke. I say “estimated” because the govt of Victor Maduro stopped releasing inflation data many months ago, for obvious reasons.
The government also heavily subsidizes gasoline and food for its people. Plus there are sizable bond payments to international creditors.
So international reserves are already dropping fast – from $22 billion in January this year, consistent with data from Venezuela’s financial institution , to $18 billion in May, to new record lows of $14.8 billion at the beginning of November.
Here’s where the “circling the whale” part comes in…
According to published reports, Venezuela has about $12 billion in bond payments due in 2016.
It could cover those payments out of the $14.8 billion that it still has in reserves immediately . But here’s the twist: Only $3 billion of these reserves are liquid. The rest?
It’s all gold bullion, Venezuela’s crown jewels.
Gold and Falling Pianos
Think of Venezuela as a hedge fund, in need of money and sitting on a big “long” position that’s worth less and fewer by the month. Traders can see this gold “whale” is in trouble, in order that they drag and let it thrash. Why attempt to catch the proverbial falling knife (or gold piano)? And, of course, the worth of gold drops even further.
And since i used to be the one who said fortnight ago that he believed gold had “well and truly bottomed,” I’ll add that we do not know the timing of those gold sales. By the time the info is released by Venezuela’s financial institution , it’s already many months old.
With that in mind, the worst of Venezuela’s latest “gold dump” might already be over or on the brink of it.
For instance, the planet Gold Council’s data from late last year showed Venezuela with 367 plenty of gold reserves (down from a peak of just about 373 tons in 2011). By the beginning of this year, that figure was reported right down to 361 tons.
So what proportion more gold has Venezuela sold altogether the months since?
We don’t know needless to say , but Bloomberg recently reported the worth of Venezuela’s gold reserves at $11.8 billion, supported the newest data from Venezuela’s financial institution . and therefore the bank’s “latest data” is from May of this year.
How much gold does that dollar figure represent?
If we use $1,266 an oz – the typical London Fix price for gold in 2014 – then, as of May, the financial institution retained around 290 plenty of gold in its vaults, by my guesstimate. which might mean the bank sold down its gold holdings by the maximum amount as 70 tons by that point , worth nearly $3 billion.
And perhaps not coincidentally, Bloomberg’s story on Venezuela’s gold sales came out on October 28. that is the same day that gold briefly popped through its 200-day moving average at $1,180 an oz before plummeting below $1,100 in seven days’ time.
This is the type of activity – the wholesale dumping of an enormous position by a “market whale” at low prices – that’s seen at rock bottom of markets.
All we’ve to try to to is point to the uk , which dumped half its gold reserves between 1999 and 2002, with gold at its lowest prices in 20 years. And what happened afterward? Gold went on to quintuple in value to the 2011 peak.
A Great Time of Buy Cheap
As 2015 winds right down to an in depth , we are faced with a Fed trapped during a great interest-rate conundrum, and that we are seeing the first seeds of inflation beginning to sprout. The U.S. remains growing its debt hoard at an astounding rate and therefore the government has shown little to no interest in paying it down.
All of which makes this an excellent time (and likely one among the last) to shop for gold, peace of mind and a touch insurance on your other assets at these great prices. When the planet is in turmoil, gold remains one among the last great stores useful .
And buying that insurance cheap against a time period isn’t a nasty idea.
A veteran investor and longtime financial journalist, JL Yastine may be a contributor to Sovereign Investor Daily. He also is editorial director, that specialize in creation and development of latest products and editorial resources which will help the Society’s members “be Sovereign.”