Guess What Piece of IMF News Sparked the 10 year Gold Bull…

What was first a “man, if this happened today, zero hedge would shit a figurative rooster” observation later turned into, “OMG, it makes so much sense now” style conclusion.

What follows is the story of how I found out the exact catalyst for the gold bull market over the past 12 years.

But first…the why.  Why and how did I find the little market nugget?

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In order to establish the “relative worth” of a precious metal, I think it’s best to use a ratio chart.  The reason is that an ounce of gold or silver is always priced in dollars (or Euros etc), so simply looking at a chart tells you if it’s going up or down against the currency.  By using a ratio chart you change the analysis of whether gold is over/underpriced in dollars to whether it is over/underpriced relative to the other metal, which makes more sense (to me).

For example, one of my top trades was buying Platinum/Gold at the near exact low in Dec 08 based on doomsday scenario / ratio analysis.

I revisit this ratio from time to time for both gold, platinum, and lately, silver.

See, it was back in April of 2010 that the Plat:Gold ratio reached 1.5, a sell point, so I sold my platinum physical (1750 from 850), and bought silver physical (19.40).

This brings me to today…

I was looking at the Gold:Silver ratio and found it is near a decade low.  Either silver underperforms gold (similar to the ratios in the linked post above) starting, well, now, or the ratio “support” cracks and silver really moonshots, i.e. continues to outperform gold as it has been.

 

I was looking at the chart when my eye caught the period of Sept/Oct 1999, when gold moved UP BY 33% IN 12 TRADING SESSIONS OUT OF NOWHERE!

Can you imagine what they’d be saying about this today?!

“JPM Morgan is Controlling Everything”

“USD being dumped by everyone, everywhere”

“Inflation is now 10,000 annualized”

“Algo / Correlations are XYZ, Crude up $10”

 

What caused the move?

A google search of “gold 10/1/1999” yielded this result, which gave me the news item that in retrospect sparked the bull:

Lease Rates And The “Washington Agreement” Gold Spike

What has come to be called the “Washington Agreement” was a bombshell dropped by the European Union, in Washington, on September 26, 1999. That was on the weekend following a G-7 meeting and preceeding an IMF/World Bank meeting. This bombshell came in the form of an announcement by the EU that they had agreed not to expand their Gold leasings and their use of Gold futures and options over the next five years (ie, till September 26, 2004).

“Gold Leasing” is selling paper in the market (that is backed by physical you hold).  There have been claims (some true) that banks have engaged in gold leasing in order to suppress the price.

The linked article cites inversion of rates as a trigger for 1999 gold move.  This same inversion of rates, called “backwardation” is what is occurring (and possibly driving) the silver bull today.

I thought this was interesting for several reasons. One, my tandem interest in PMs.  Two, my love of a good conspiracy.  And three,  it perfectly explains the fundamental shift that occurred to support the move beyond ridiculous ZIRP — > it was Central Banks, those party to most of the gold, shifted their attitude and stopping selling the paper (as aggressively, presumably).

Perhaps this news is old hat, but it was news to me, and I enjoyed finding the spike serendipitously, and researching the cause.