Currency Intervention and the Leap-Year Gold Massacre

Christopher Barker, The Motley Fool
Updated

Although Fed Chairman Ben Bernanke would like for you to think otherwise, gold is immutably money.

Central banks hold it within strategic currency reserves, and are busily acquiring more. Observing the unsustainable deficit-spending that continues to plague U.S. fiscal policy, and the unprecedented campaigns of intervention conducted by the relevant central banks in response to the global debt crisis, one can hardly feign surprise at the resurgent role of gold as a counterweight to the impaired condition of the world's major paper currencies.

As much as Bernanke may like to promote the impression that the Federal Reserve maintains a dismissive attitude toward gold, a growing body of evidence tells another story entirely. On two particularly noteworthy occasions over the past year, the gold and silver markets exhibited behavior so thoroughly bizarre and deeply counterintuitive that even former skeptics were forced to acknowledge the likely hand of central banks in these dramatic sell-off events.


The first such event took place Sept. 6, 2011, when Switzerland's central bank declared it was prepared to "purchase foreign currencies in unlimited quantities" in order to prevent the Swiss franc from appreciating beyond the euro exchange rate of 1.20. On that same date, $740 million worth of gold bullion changed hands on the COMEX during just one single minute. I encourage readers to review my article "Is Gold Being Suppressed?" that revealed that even the head gold trader for Goldman Sachs considered the possibility of an official-sector role in gold's counterintuitive plunge.

The unforgettable Leap-Year Gold (and Silver) Massacre
If you ask me 10 years from now for a rundown of the most memorable moments in this entire precious-metals bull-market cycle, I'll place the events of Feb. 29, 2012, right near the top of my list. The astonishing circumstances surrounding the sell-off -- popularly dubbed the "Leap-Year Gold Massacre" -- were so divorced from normal market dynamics as to yield a chorus of memorable commentary from some surprising sources. It appears more and more market observers may be ready to concede that GATA was right all along.

To set the stage, it's important for readers to recall that this sell-off in gold and silver occurred on the very same day that the European Central Bank reported doling out $713 billion in low-cost, three-year loans to a staggering 800 financial institutions! Meanwhile, the financial headlines of the day were dominated by Bernanke's congressional testimony, and the purported revelation that further monetary easing may not be immediately forthcoming. Stunned by the ferocity of the concurrent sell-off, I spent the day surveying public reaction to the event within a blog post titled: "Gold Manipulation, Currency Intervention, and the Death of Free-Market Capitalism". And I wasn't alone.

Jean-Marie Eveillard, who manages some $60 billion in assets at First Eagle Funds, had this to say in an interview with King World News: "Usually I don't have much to say for bullion regarding day to day trading. But a move of $75 is somewhat striking. Central banks acknowledge they intervene in foreign exchange markets. They (central banks) sort of don't exactly deny, but they are very quiet about the fact that obviously they also intervene in the gold market."

After looking over the data, fund manager Eric Sprott noted in a separate King World News interview that the paper equivalent of 500 million ounces of silver changed hands on the COMEX that day. That included an astounding 225 million ounces -- or nearly $8 billion in market value -- in the span of just 30 minutes! For context, Sprott points out that "in one year the silver miners only produce 800 million ounces." Sprott then concluded: "No rational person could believe it had anything to do with the real market for silver."

Although the U.S. Commodity Futures Trading Commission's investigation into silver manipulation is now in its fourth year, Commissioner Bart Chilton has already stuck his neck out for silver investors by declaring publicly: "I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price."

How to succeed in this market
One might reasonably ask: Just what on earth am I thinking by continuing to invest in a market in which I perceive frequent price suppression that is coordinated by powerful and deep-pocketed Western central banks? To that question, I would respond in two parts.

For starters, the meaningful appreciation of gold and silver in U.S. dollar terms over the trailing decade confirms that any such price suppression is employed not as a mechanism to prevent the metals from rising in price. Even central banks have limits to the reach of their power. Rather, I share James Turk's view that intervention in gold and silver facilitates a "managed retreat" vis-a-vis the currency-related impacts of fiscal imbalances plus monetary and liquidity interventions.

Second, I believe that a maturing bull-market cycle combined with a constrained physical supply of the metals is eroding the efficacy of such measures over time, and in my view the increasingly obvious nature of those interventions coincides with a closing window of opportunity for the banks to engage in such practices. Patience, then, and the conviction to stare gut-wrenching volatility in the face without darting for the exits, are key hallmarks of a successful precious-metals investor.

Investors have a voice in the matter, and that voice is amplified through the offtake of physical supply. A strongly held stake in Central Fund of Canada (ASE: CEF) , for example, theoretically disempowers price manipulation by gradually reducing the available physical supply of gold and silver as the basis for highly leveraged shorts in the paper markets. Sprott Asset Management also has a pair of physical bullion offerings that are likewise widely trusted as representing 100% unencumbered bullion. They are the Sprott Physical Gold Trust (NYS: PHYS) and the Sprott Physical Silver Trust (NYS: PSLV) . Tax implications for all three bullion vehicles must be well understood. First Majestic Silver (NYS: AG) , whose management recently revealed to me the secrets to their success, offers silver bullion products through its website.

Before rushing to a popular vehicle like the iShares Silver Trust (NYS: SLV) , Fools may wish to take note of recent research by Nanex -- the same firm that provided important insights into the "flash crash" of 2010 -- regarding extremely high-frequency trading that coincided with an unusually abrupt price-drop in the security on Wednesday. According to Nanex, the quote rate for the silver ETF exceeded 75,000 quotes per second during a 25-milisecond period. As if the precious-metals market were not already strewn with a sufficient array of hazards, now investors have to contend with countertrend raids by flash-crashing super-computers.

Thus far, it seems, no one can confuse honest money with easy money.

At the time thisarticle was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of First Majestic Silver.Motley Fool newsletter serviceshave recommended buying shares of Goldman Sachs. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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