DID THE G-7 GROUP OF NATIONS ACT TO "CALM IRRATIONAL MARKET MOVES" LAST WEEK?
Excerpts from GLOBAL WATCH:
THE GOLD FORECASTER
by Julian D.W. Phillips
March 28, 2008

The 0.75% drop in the Fed Funds rate did not impress the market last week, expecting a full 1%. The impression given was that they might not be effective in calming the credit markets and returning the economy to growth. The insinuation that the fight against inflation had not stopped also encouraged the thoughts that the U.S. cannot avoid slipping into a recession and a self-feeding one at that. But after the announcement, another set of actions took place that were not normal market moves. Indeed they gave the distinct impression that they were intervention of very large proportions. First the gold and silver prices began to tumble, followed by the recovery in the $, all of which happened in an almost straight line. Markets don’t do that to that extent! 

Then we remembered the warning given by the G-7 Group of rich nations, that they would act jointly to “calm irrational market moves”, saying they would not say when and how they would do it so they would not lose its effect. It is extremely difficult not to conclude that this happened last week. The short-term future of the markets has to take this into account so we must look at what we can expect to happen, both if this did not happen and if it did.

If no G-7 concerted action took place last week

An analysis of the market action of last week, shows that the tumble of the gold and silver prices took place just ahead of the recovery of the $, but with that in mind we have to acknowledge that the gold price was very sensitive to any move in the $ at that point in time, so would react as it started to move. Both gold and silver dropped in a vertical line with no hiccups at all a most unusual move when it went 10% down in gold and 20% in silver. This alone is an argument but a difficult one to use as convincing. But then we look at the other factors involved. Wise Investors place protective stops in position at levels they need to protect against losses and to retain profits, so when a precipitous fall takes place they are taken out of the picture automatically. This can and will increase the downward pressure on the prices. Initially all the action was on COMEX. On gold we saw a sell off in the gold ETFs of 25 tonnes in two days. 

We believe the initial selling came from COMEX. This was huge and triggered the run. If no interference in the gold price took place, we would expect any fall in the $ that occurs from now on will be accompanied by a build-up in long positions in both these markets. As with any consolidation weak holders are shaken out and buyers come in to pick up bargains. This will happen in gold and silver. Indeed, over the long-term we forecast that the exchange rate of the $: will not be the main influence on the gold and silver prices but inflation, which is rising steadily and should accelerate as more attempts are made to prevent the global economy from entering recession. We do not believe that the up-trend in gold and silver, based on fundamentals has been altered last week, one iota it has simply been delayed until this phase of consolidation is over. Hence the sharp drop should be followed by a hefty bounce and more consolidation. With the up-trend unchanged, on that basis it is only a matter of time before the rise resumes in gold and silver and the fall in the $ continues.

If G-7 concerted action did take place last week.

If the G-7 rich nations decided that the fall in the $ had to be ‘calmed’ they would have moved in quickly and forcefully to achieve this calming, so that investors and other market players would stand back and react accordingly. This is what did happen. The rise of the $ was quick and intense and held there as the week before the long weekend and next week’s month end happened. Good timing for a “calming” strike? Both gold and silver plummeted as a result of action on COMEX, but the picture is clearer when we look at silver. There are solid reports of silver shortages building up across North America, from dealers to the Mints. It appears far more serious than a simple delivery problem. Investment demand has not blinked and eyelid during the last week when this action took place, increasing by over 130 tonnes. So why did the silver price plummet on COMEX? In sympathy with the U.S. $ rise and the fall of gold? If it was a “calming” raid only on the $ only the fall in the gold and silver price was ‘collateral’ damage only and will bounce back from whence it came the moment the $ falls again. 

If it was a calming raid we would expect over time to see the following: -

1.      Large surplus holders of the $ would see an opportunity to start selling large quantities of them knowing that at last the G-7 were prepared [for a while at least] to buy them, so holding up the price as very, very, large quantities of the $ were unloaded on the world’s exchanges.

2.      Speculators in the style of George Soros would join the party and add tremendous pressure on the $ exchange rate knowing that at some stage, as history shows as inevitable, the G-7 will stop holding rates up allowing a very profitable tumble for these speculators.

3.      The time it takes to “calm” the markets, each time the rate becomes “irrational”, simply postpones the day when the $ reflects its true international value.

We therefore believe that any such G-7 moves postpone and heighten the decay in the global money system and precede more intense intervention such as Exchange and Capital Controls. The regulations that come with such controls may well certainly include those governing ownership of gold and silver, so as we have said in the past you should be acting now to ensure that any gold or silver you hold overseas cannot be reached through your ownership by the authorities. [Subscribers to our newsletter, please contact us for more information on how to protect yourselves from their impact] 

Perhaps the most important feature of such “calming” is that that it precedes further decay in the global economy and exchanges and will do nothing to correct matters.

“Calming” intervention by the G-7 precedes further decay in the global economy” 

© 2008 Julian D. W. Phillips
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