Gold has not made new highs in many months. Gold peaked last year at US$2067 on August 6. The 7 month down leg of more than 18% as been deep enough and long enough that some commentators are now saying that the bull market has now turned to a bear market for gold. Losing faith is understandable because falling prices feel bad. But this week we want to show that current prices may not reflect reality. We will review the story of Archegos Capital Management which proved that prices often are false signals, a picture painted by others who have their own agenda. Then we can relate that story back to gold and silver by making the point that 7 months of down leg means nothing.
OFTEN WHAT WE SEE IS JUST WHAT OTHERS WANT US TO SEE
Archegos is something almost no one heard of until last week. Its founder has had past run ins with stock market regulators for breaking the rules. Regardless giant global banks like Mitsubishi, Credit Suisse and Nomura loaned billions of dollars to Archegos. Importantly those loans appear to have been on the scale of about 10 to 1. For example, if Archegos started with one billion, they then borrowed ten billion against that one billion, making a total of eleven billion available for ‘investing’. So its basically a hedge fund but since all money comes from the owner, its called a ‘family office’.
Apparently, Archegos investment strategy was to keep pouring money into the same few stocks so that the resultant rising price action would draw other investors into those same stocks at higher prices. Presumably Archegos intended to spark a rally and then sell into that rally near the top for a nice profit. Today’s main lesson is: Price action does not always tell the truth.
Instead of selling at the top, Archegos suffered a huge margin call for many billions of dollars. Apparently, they had borrowed so much money, from many different banks, that once all the banks came realize the size of the debt, faith was lost in Archegos. The giant banks will all lose billions and Archegos itself may even have the original billion wiped out to zero. Thus, today’s second lesson is: Banks have a simple business – they rent out umbrellas on sunny days but need umbrellas back when it rains to keep themselves dry. Sometimes, as in the case with Archegos, they get stuck in the hurricane without any cover.
For months on end, to an outsider watching the upward progress of stocks bought by Archegos with ‘borrowed’ money from major banks, there was no sign of trouble whatsoever. Many investors were enticed to buy shares by rising prices. Those investors now wish they had not as prices declined dramatically as the scheme broke up, leaving banks to sell for whatever could be recouped. Until something broke, the price action was a beautiful picture painted by Archegos. Once the break happens [the reason for the break barely matters] that leverage goes into reverse.
Here is another proof of the main lesson. It turned out that once the banks recognized that rain was coming, they argued over the umbrella, as there was not enough protection to go around. Calling for a ‘bailout’ early on, some of the banks tried to prevent all banks from selling shares so quickly that the beautiful rising price picture would be revealed as a forgery. So once again we see that price action does not always tell the truth. Once that bailout conversation failed, it was each bank for themselves.
To recap the story what we see everyday over a very long period of time can very easily be a picture painted for us by someone else who is not displaying the entire truth. Once the truth cannot be hidden, everyone including sophisticated bankers worry about themselves only.
SHOULD I SELL GOLD NOW?
Let’s apply the main lesson to gold which has been falling for months. The picture painted certainly looks grim. Yet as we learned up above maybe the picture is not the entire truth. Is there some levered ’investor’ whose method is betting against retail buyers that used stimulus checks to buy gold and silver? Nothing in the Archegos story confirms or denies this. If there is one, we will not know until prices spike higher. We will not know until its too late for buying the metals. We will not know until after the global banks know.
Given the above story, should people sell metals because they have fallen in price for months? NO. Maybe the story above raises a vital question, when Central Banks lower interest rates and ensure liquidity, whom do those actions help the most?
GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
31-03-2021 1685.35 1691.05 1222.55 1226.52 1435.08 1440.61
30-03-2021 1696.70 1683.95 1232.48 1227.77 1445.08 1436.91
29-03-2021 1723.95 1705.95 1247.62 1235.79 1464.15 1448.52
26-03-2021 1727.85 1731.80 1253.56 1254.86 1465.91 1469.09
25-03-2021 1729.20 1737.30 1260.07 1266.67 1463.94 1472.71
24-03-2021 1734.05 1730.50 1264.12 1261.36 1466.14 1462.79
23-03-2021 1739.25 1726.20 1264.26 1251.50 1462.36 1454.15
22-03-2021 1733.40 1736.15 1251.34 1254.89 1455.54 1456.11
19-03-2021 1737.20 1735.20 1246.79 1252.47 1460.12 1459.82
18-03-2021 1734.10 1725.90 1241.44 1239.37 1452.66 1448.03
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