Why Gold Really Crashed and What You Can Do About It

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The news is great at telling us what's happening. But knowing what's happening is a lot different than understanding what happened – and that's what makes the difference between an average investor and truly great investors.

Gold's crash Monday is a perfect example. The media was falling all over itself as one pundit after the other came on TV to talk about how gold was falling and how far off its highs it was. Few tied the devastating slide to real economic events — let alone made the connection to actual trading.

But that's my bread and butter. Today I'm going to tell you what really happened and why – from a market insider's perspective. Then I'm going to tell you what to expect next and, most importantly, how you can use the situation to your advantage.

There are three fundamental things going on – all of which are at a very high level and all of which are completely transparent to most investors:

1) Japan caused the biggest single one-day gold sell off in 30 years.

No one sold their gold holdings by choice; many big players were "forced" to sell gold to meet margin calls associated with Japanese bond holdings that have gone wild since "Abenomics" came on to the scene.

You see, newly elected Japanese Prime Minister, Shinzo Abe, and his sidekick Haruhiko Kuroda – Bernanke's contemporary at the Bank of Japan — have embarked on "Abenomics," or the injection of $1.4 trillion into the Japanese monetary system over the next two years as a means of stimulating the moribund Japanese economy. This will effectively double the Japanese monetary base to 270 trillion yen, or $2.9 trillion USD.

That's hard to grasp in an era of trillion-dollar budgets, so let me put what they're doing into perspective. In order to hit his targets, Kuroda is effectively going to have to inject, print, stimulate or quantitatively ease to the tune of approximately $150 billion a month – that's 76% more than the $85 billion a month Uncle Ben and the Fed have been kicking in here, in an economy that's roughly one-third the size.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. george bloom | April 18, 2013

    the part about the COT makes no sense. this was a pre wipeout report. open interest in silver built from 140k to 166k in a few days, on a down market. this set up, and a tweeted, a large breakout situation, up or down. DOWN was the manipulated direction as large orders at the market were placed to wipe out ALL STOPS. Look at the big increase in large specs position short, these are hedge funds. the GOOD thing for longs, THOSE SHORTS HAVE TO LIQUIDATE PRIOR TO DELIVERY. their rules do not allow them to hold positions into delivery. SMART longs know this, AND the commercials were adding longs as the large specs were selling, and commercials can hold positions into delivery. GOLD a similar open interest situation occurred. my guess – spike bottom, short covering rally lies IMMEDIATELY AHEAD.

  2. Franklin D. Lomax, Sr. | April 18, 2013

    Keith: First time I have seen any article that fully supports the view I've gleaned over twenty years, and outs the insanity of fiat currency nations, et al.

    When GGN, one of my favorite gold stock holding funds, and dividend payers, pays me some 130 DRIP dividend shares each month, I expect that to represent about one ounce of gold, per month, if GGN continues to exist, with its basic gold stock inventory, and its Buffett style hedge fund approach to selling calls, and such. We'll see, as GGN's monthly dividend date is the middle of next week.

    Since an ounce is an ounce, unlike the Zimbabwe, US, and other fiat currencies, that 11 % to 12.5% yearly dividend, if GGN survives this sham price drop, deliberately setup to swipe Cyprus gold, at reduced prices, should resemble a dozen ounces of gold, with it's value unaffected by the fact that our US idiots are not quite as effective at destroying our US dollar, as the other nations idiots driving their own currencies into toilet tissue values.

    I have been unable to get any response to repeated requests for a professional analysts views on GGN survivability, albeit it was mentioned as a favorite play, after I mentioned it in a couple of comments, asking for some estimate of its future values. Could you speak to that?

    Thanks!

  3. patrick o' sullivan | April 18, 2013

    Keith,what about those who have bought pyhsical gold.also someone like myself that bought 250 units of the zurichkantonal bank's gold etf,between 2009 and 2010.SHOULD I SELL THEM ,AND BUY ACTUAL PHYSICAL GOLD FROM SOME OTHER OUTFIT,AS I CANNOT BUY THE ACTUAL PHYSICAL GOLD FROM THE ZURICH KANTONAL BANK ,UNLESS IT IS A 12.5 KILOGRAME BAR,WHICH I DON'T HAVE ENOUGH MONEY TO MAKE UP TO GET THE 12.5 KILOGRAM BAR.(250 UNITS IS APPROX.250 OUNCES.CAN YOU HELP ME ON THIS.MANY REGARDS.PATRICK O'SULLIVAN(LIVING IN IRELAND.

  4. WG | April 18, 2013

    Your reference to "trailing stops that can't be game". AS I know it, there are stop and stop limit orders and both have limitations that can make it look like you have been gamed when the market jumps over a stop limit and you are still in to see and experience much lower prices or you enter a stop order and the market has a gap down opening and the price you geet is 3 or 4 points lower than the limit price you put in for. Is there another type of order that I do not know about???

    Also in another article I read this morning it made reference to the Repo markets shutting down on gold and causing alot of trouble in the world of GOLD. Can you comment on this??

    WG

  5. H. Craig Bradley | April 18, 2013

    SOPHISTCATON ("Swanky")

    Don't forget PUTS ( The trading or hedging option used by the "sophisticated" investors) cost money too, they sure are not free. The cost of a PUT contract can range 1%-2% of your position (shares owned) and depends upon the duration of the contract, the timing, and the current price of the PUT ( yes, option contract prices do fluxuate). Not necessarily cheap, but better than a (big) loss. No insurance policy is free as they all have premiums.

  6. H. Craig Bradley | April 18, 2013

    A BIT MORE K&A ( Knowledge & 'Understanding')

    … "While central banks and politicians have proclaimed the Great Crisis as a relic of the past, there is an element to all this “liquidity” coming from central banks that acts in a counterproductive fashion. We saw this with QE 2, and the Federal Reserve itself has studied liquidity under these large scale asset purchases (such as QE) and determined that QE’s actually disrupt collateral chains. The bigger the QE, the less liquid the financial system grows because QE essentially removes usable collateral from the aggregate collateral pool."…

    " in times of extreme stress, gold acts like a universal liquidity stopgap – when all else fails, repo gold. The operational reality of a gold repo is a gold lease, charged at the forward rate (GOFO). In terms of market mechanics, a dramatic increase in gold leasing is seen as a massive increase in supply on the paper markets"..

    http://www.alhambrapartners.com/2013/04/15/we-have-seen-gold-prices-act-like-this-before/

  7. Tib Csabai | April 18, 2013

    Gold has been manipulated lower in order to intensify the sanctions on Iran. It will be kept in place so long as it is viewed as having a negative impact on the Iranian economy.

    Iran is using gold to pay for critical needs, and lowering the price of gold increases the amount Iran has to pay. The thinking is that Iran will run out of gold, and thereby will have to adhere to the US, et al, sanctions, in a fashion the current effort and the military threats are unable to manifest.

    • Jeff Pluim | April 20, 2013

      Tib, you are correct. I have been saying this for some time. Iran is basically shut out of using the USD for its oil trades and so has an agreement to swap its oil for gold with China. The combination of low gold and oil has got to be an economy killer for Iran.

  8. B Lambert | April 19, 2013

    OR perhaps the gold market was intentionally manipulated lower by the same people that have been manipulating everything else from interest rates to equities for the past 5 years (actually 15 but whose counting). The sooner Central Bank get out of the way and we return to letting markets freely allocate capital without interference and manipulation the sooner the real economy will find a true bottom and begin to grow (for real) again. The gold market didn't crash. The gold market WAS CRASHED intentionally. COMEX made a sizable physical delivery a couple of weeks ago and need to buy more physical gold. An event like Friday/Monday make it much easier to do so without causing gold prices to skyrocket.

    The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract (see below) in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level… the line in the sand.

    Two hours later the initial selling, rumoured to have been routed through Merrill Lynch's floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted 'short sale', which by driving prices sharply lower in a display of 'shock & awe' – would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called 'stopped-out' in market parlance – probably hidden the unimpeachable (?) $1540 level.

    The selling was timed for optimal impact with New York at its most liquid, while key overseas gold markets including London were open and able feel the impact. The estimated 400 tonne of gold futures selling in total equates to 15% of annual gold mine production – too much for the market to readily absorb, especially with sentiment weak.

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