Gold found a bottom a year ago at $1180 on June 30 at precisely 10:00 AM EST, the final London fix of the quarter.  This price was tested again on the last day of 2013, clearly being driven by predatory speculators.

Since then, the gold market has changed markedly.  During the two-and-a-half year decline, price tended to fall during Western hours, as speculators sold and shorted, and to rise in Eastern hours as Asia exploited soft prices to buy physical metal.  That pattern has reversed, with gold tending to be strong in the West, as speculators reenter the market, and soft in the East, as credit troubles in China and elsewhere slow purchases.

Bank analysts, such as at Societe Generale, have seized on weak physical markets – meaning the flow of gold to Asia has slowed marginally – to repeat bearish prognostications.  But the story is once again Western speculators and the fact that the massive transfers of gold to the East over the past two years have left a lot less gold in the West to speculate on.

Western speculators have reentered the market in part because, as argued in the attached report, there has been a shift in perception such that inflation has become the primary risk to the debt markets, not deflation.

Myrmikan’s investment thesis is based on the premise that interest rates have been artificially low, debt levels too high, and that gold is the antithesis of debt.  Debt bubbles burst either through inflation or deflation, and either way benefits gold as against all other financial assets – investing in gold and unlevered gold mining stocks permits agnosticism as to the method of debt default.

Looking back some time hence, it may well be that the shift from a deflationary to inflationary mindset helped cause gold’s huge correction.  But, whereas gold does well in real terms in a deflationary debt default, it really flies in nominal terms during inflationary defaults.  This is the prospect before us.

Regarding yesterday’s $30 decline in gold prices, it is worthy of note that 10% of yesterday’s volume occurred in the span of just 11 trading minutes.

Gold stocks remain deeply depressed, but gold remains near 300-year lows in terms of the dominant central bank’s balance sheet – gains in the junior sector can be stunningly large and swift given the correct conditions.