Statistically, Almost Impossible: The Mystery of Gold’s Sudden Collapse

A senior Italian gentleman lived alone in Dandenong.

He wanted to plant his annual tomato garden, but it was very difficult work, as the ground was hard. His only son, Vinnie, who used to help him, was in prison.

The old man wrote a letter to his son and described his predicament:

‘Dear Vincent, I am feeling pretty sad because it looks like I won’t be able to plant my tomato garden this year. I’m just getting too old to be digging up a garden plot. I know if you were here my troubles would be over. I know you would be happy to dig the plot for me, like in the old days. Love, Papa.’

A few days later he received a letter from his son.

‘Dear Papa, don’t dig up that garden. That’ s where the bodies are buried! Love, Vinnie.’

At 4am the next morning, Victorian police arrived and dug up the entire area…without finding any bodies.

They apologized to the old man and left. That same day the old man received another letter from his son.

‘Dear Papa, go ahead and plant the tomatoes now. That’s the best I could do under the circumstances. Love you, Vinnie.’

Sometimes, and particularly in a market like this, we just need a laugh.

But that’s not the only reason why I tell this story…

You see, our tale of Vinnie and Papa might not be a bad analogy to what we witnessed on the 15th of April 2013.

A Sigma Event

What if Papa is the ailing Federal Reserve, struggling to keep his garden under control, the monetary system?

And Vinnie is the Fed’s corrupt, financial off-spawn, doing what it could…‘under the circumstances’? That is, to undermine gold’s role as competition to fiat currency.

On the 15th of April, the gold market fell so far, and so fast, that statistically the move should have been as good as impossible.

Mathematically, it was a ‘7.5 sigma move’, in other words, under normal conditions it would only happen once every trillion years or so.

I’ll put it another way.

Does the move in mid-April look like it belongs in the rest of this 18 month gold chart?

Nothing to See Here Folks … Move Right Along


Source: StockCharts

This move will be something to tell the grandkids about. It should never have happened.

The move was successfully delivered as the ultimate conviction-tester for gold investors. Because if gold was flawed as a ‘safe-haven’, then maybe we should sell…?

So…what happened next?

To find out, I started local, and asked the guys at Gold Stackers, a Melbourne-based, online dealership, what was happening there. They said:

We’re seeing unprecedented levels of demand for physical bullion — 99% of clients are buying, not selling. Volumes have been five-fold normal for the past three weeks, and it shows no sign of abating. Inventory throughout the industry is running low — we are hearing of outrageous price gouging at some dealers as the price of physical disconnects from paper.

‘Any US originating products such as American Silver Eagles are in very short supply, and the wholesale premiums are being adjusted by US suppliers daily, which naturally flows through to the retail price.

Currently domestic supply of both gold and silver is still strong, however lead times are increasing due to the sheer volume of wholesale orders in the system while retail dealers wait to replenish local stocks. Some businesses however are opting to close their online stores and only deal in-person. Right now the only guaranteed way of locking in prices is to place an order with your dealer and to wait for delivery.

And then I asked Jordan Elisio, Chief Economist at ABC Bullion up in Sydney:

We’ve had a packed showroom all day, a line up 100 deep in our hallway and we’ve had to hire temps to deal with the phone and email ordering. My hunch was that over 90% was on the buy side, but when I asked finance to take a look it was actually closer to 99%. That’s not a misprint — we are seeing roughly 99 physical buyers to every 1 seller right now. Strange end to a bull market I’d say.

Looking outside our shores, the international response has been far more dramatic.

In Beijing, the hub of the biggest gold consuming nation globally, dealers were sold out.

In Hong Kong, it wasn’t much different. This report from a trip to a dealer said it all:

Went to Hang Seng bullion counter yesterday. The line was out the door. It took an hour wait to see a teller. When I asked if people were buying in the dip or selling in panic, she told me that they haven’t had one ounce of gold sold back to them all day. She told me they have sold more gold in 24 hrs than they normally do in 3 months.

It’s the same in Mumbai, Dubai and Shanghai: record queues, buyer-no-seller, metal running out, or gone altogether.

I look forward to seeing the monthly figures for Indian and Chinese gold imports. These two cornerstones of the physical market had already gone into overdrive.

Who knows what the April stats will look like?

So it would seem that whichever of the Fed’s buddies tried to cause mass panic selling — they may have misjudged their prey.

Dr Alex Cowie
Editor, Diggers & Drillers

Ed Note: Buying physical gold and silver isn’t hard, but there are easier ways to bet on the gold and silver price. In today’s Money Morning Premium Notes, Kris reveals the eight simple ways Aussie investors can punt on metal prices without going through the hassle of storing, securing and insuring physical metal.

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