I had the chance to reconnect this afternoon with a NYC metals and mining equity fund manager, whose total firm assets exceed $10 billion. While he can’t be referenced at this time, it was a fascinating conversation worth sharing.

What stood out most was his belief that this week’s frightening collapse in gold may have provided the cover for, “excessive stimulus coming out of the U.S., Japan, other parts of Asia, and the U.K.,” with the beneficiaries of the take-down, being the central banks themselves—through both increased monetization and increased gold buying.

When asked what the week was like from a fund perspective, he indicated that, “It was a good week. We had a downturn in the market, but I think we’re in a more positive environment going forward. Things have not changed with regard to developments in the global economy that support gold prices, other than the fact that gold prices came down.”

In terms of adding positions, whether it be in metals or mining shares, he stated that, “We tell our clients to be ‘average-costers’—and that’s what we try to do. We don’t buy all at once, sometimes we buy more when the opportunity is there, but I think dollar cost averaging is one of the best strategies there is.”

With respect to which catalyst may have set-off the collapse in the gold market, he replied by saying, “The way I understand the gold price move in the past couple weeks, is that Japan made a big statement with their shock and awe monetary policy, and clearly the yen is weak and has been falling, and the dollar is strong. I just have to think there’s some kind of trade going on where you short the yen, go long the dollar, and you short gold.”

While not pointing to manipulation as necessarily being the cause or propellant of the take-down, he explained that, “Some are suggesting that it was manipulated. I can’t offer anything on that…[but when] you think about other central banks around the world, there’s probably some rationale to see a lower gold price if you’re going to have so much excessive stimulus coming out of the U.S., Japan, other parts of Asia, and the U.K. If central banks can manage the value of money and the cost of money—they can manage other markets as well.”

He further added that, “Central banks have been buying gold, and I would think this is a level they find more compelling given they paid higher prices last year than where it’s trading at now. They bought what, 500 tonnes last year at higher prices? And that [metal] wasn’t for a trade.”

In terms of the immediate beneficiaries of the take-down, he commented that, Somebody probably made $2-$3 billion dollars on that trade earlier this week. We’ll [may] find out in some financials somewhere, [because] it’ll have to show up I would think. It’s not going to be easy to discern how [it] worked, but maybe it was a group of traders that muscled in.”

Quickly ending the call, he affirmed that, The trade we saw this last week was a paper trade—it wasn’t physical.”

Bottom Line: Two major groups benefited tremendously this week: Traders and funds short ahead of the crash, and all ‘average-cost’ buyers of gold from here on out—whether it be central banks, sovereign governments, or Vietnamese grandmothers.

Next month’s 13-f filings should be quite interesting, as SAC Capital Partner’s $80 million dollar gold and silver “straddle” may have paid off in spades.

Best,
Tekoa Da Silva
Bull Market Thinking