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What’s driving paper gold?
Posted by Izabella Kaminska on Sep 03 12:54.

Gold madness is under way, and no one — as far as we can tell — has a good explanation as to why:
Gold - FT

Here are some observations and views we’ve come across:

* MF Global noted a potential knock-on effect from the soon-to-be closed DB double long crude oil fund, as money is reinvested into gold.

* MF Global, however, also said the best explanation they had heard was of possible buying by a central bank.

* We noted, gold lease rates (LIBOR-GOFO) are still negative. On September 2 the lease rate came in at -0.03419 and on September 3 it came in at -0.04116.

* Dennis Gartman of the Gartman Letter — who is not a goldbug — last week alerted readers to some important technical resistance factors in euro-and sterling-denominated gold.

* We noted the IMF’s $250bn SDR injection took place last Friday, meaning there’s an extra $250bn worth of paper that can be exchanged into freely available dollars, yens, euros and sterling by central banks around the world. Would they use the money to beef up their gold reserves?

* Barcap put out a technical note on Wednesday saying gold was on the verge of resuming its bull trend. As they wrote:

Historically, the time is ripe for a sustained advance, as recent bull trends have occurred in odd numbered years, with the breakouts occurring during September. Indeed, September is the strongest month of the year from a seasonal perspective. With price action unfolding in terms very similar to 2005 and 2007, we look for higher gold over the next several quarters in both dollar and euro terms.(Click to enlarge)
Barcap on gold technicals
And then there’s what Dennis Gartman had to say on Thursday, which strikes us as particularly noteworthy (our emphasis):THE DOLLAR IS WEAK and although it is not violently so, it is weak relative to nearly all of its major and minor trading partners, and it is particularly so relative to gold. Indeed, perhaps the most important comment we can make relative to the forex market… and relative to nearly all capital markets generally… this morning is that there is growing disdain for currencies generally and there is growing enamourment of gold as the most important ‘currency” of all. We are not Gold Bugs here at TGL. That is rather obvious, for on balance we’ve long subscribed to the Keynesian notion that gold is indeed a “barbarous relic.” We’ve been disdainful of the Gold Bugs during our entire career, seeing most of them as gun-toting, canned-food hoarding, doomsday-awaiting crotchety old geezers with little good to say about society generally, and much bad. However, with the advent of the spending, entitlement and tax programs being put forth by the current Administration, and with the same sorts of tax/spend programs being embraced so fully abroad, gold’s become the third reservable currency after the US dollar and the EUR, and it is swiftly on its way to becoming the 2nd.The tectonic plates of the global economy shifted rather vividly yesterday when gold soared to the upside and did so not just in terms of the US dollar, but in terms of every currency everywhere. It was as if the flood gates had spilled open and a torrent of buying of gold along with a torrent of selling of dollars, of sterling, of EURs, of Yen, of rupees, of rubles and of Renminbi hit the market.Perhaps this was, as some have tried to explain it away, a result of the less-than-liquid market conditions that prevail as the summer is ending and as the dealing rooms around the world are manned by less-than-full compliments of senior traders. We have argued this case ourselves, having warned our readers/clients and friends around the world of being too active and taking too large positions at this time of the year, preferring to await the return of liquidity that should mark next week’s activity. But that having been said, we cannot discount the seriousness… the violence… the material nature of the moves in favour of gold yesterday across the forex spectrum.Something more than mere illiquidity was and is at work in the gold market, and despite our antipathy toward this “barbarous relic,” attention really must be paid.And that’s the interesting thing: gold has suddenly soared not just in terms of the US dollar, but in terms of every currency everywhere. As the FT’s commodities correspondent noted to us, that comes despite a lack of physical demand.
In which case, perhaps it can be down to that special-drawing-right liquidity injection after all. The SDR wasn’t called paper gold for nothing.

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