What are your thoughts. Deflation threat? Evil banker smackdown? Cyprus situation resolved?
I have heard many theories about this drop, ranging from the apologogetic (gold bugs) to the triumphant (easy money theorists).
There’s a fundamental thing to consider: the demand for physical (coins, bullion, ingots) gold and even silver remains very strong. Small savers and investors have not stopped buying. Sales of US Mint Silver Eagles are at an all time high (first quarter 2013 saw sales raising to an unbelievable 14.2 million ounces), and mints cannot keep up with demand of physical gold coins and bullions.
So what are we to make of this? The problem is, of course, paper gold, meaning ETF’s. The amount of positions taken just in the first quarter of 2013 is staggering. It’s a mass of future contracts well in excess of any gold that can possibily be mined (especially with a global slowdown in mining in progress) or consumed. A correction was necessary and it will probably continue. At over $1500/oz gold was seriously overpriced (yes, I am not a “$5000/oz in the near future” guy despite owning considerable amounts of gold) and silver even more so, since there’s no shortage of silver ore.
One of the chief causes is the volatility presently reigning in the Japanese stock market. Big keiretsu banks and investment funds operating in Japan have always been huge gold ETF buyers and sellers. Not to mention Japanese savers have always been avid hoarders of gold coins and bullion. With panic setting in Tokyo, these banks and funds have started dumping gold ETF’s to get liquidity, to be quickly followed by panicked investors worldwide. Their losses, the hoarders’ gain (especially those who bought the bulk of their holdings before 2011). Unless this is the first stage in the long-awaited correction in stocks and ETF’s, gold will rebound in the near future. Otherwise, price will continue to drop as greedy investors will scramble for liquidity before being bailed out once again.
One may argue “Why, in light of what happened in Cyprus and how real life price inflation is heating up, gold isn’t skyrocketing?”. The reasons are simple. There aren’t many who plan for the future. Those who buy gold as an edge against inflation or simply to have something tangible to leave to their children are such a small minority they can barely affect the price of gold. Asian buyers prefer small, constant purchases. Europeans are actually selling their gold (if they haven’t already) either to get desperately needed liquidity or tempted by high prices. The present “in” thing is stock trading. Gold ETF’s are just a side bubble to the big bubble waiting to burst. Because it must burst: I have seen firms with the same net worth as in 2007 posting profits six times higher… this is sheer lunacy.
Agreed that gold was overpriced and was due for a serious shakedown. But I keep hearing “it’s only the price of paper gold that’s effected.” If that’s so then there should be a large disconnect between the price of physicals and paper.
Many dealers of physical PMs base their price on the spot price and then add a premium. Also, some of the premiums nowadays are ridiculously high.
Why would a political philosophy be able to explain an economic event?
because we are so fucking good, John.
Before I was in a hurry (when am I not?) so I left out one important consideration.
Since 2004, when the first gold-backed ETF fund debuted in Australia, analysts have kept wondering how these new financial instruments would affect the price of gold. The answer came in 2011 when, in face of declining gold demand, price increased considerably. What had changed? Gold-backed ETF’s had boomed. While nobody felt like talking about cause and effect, all agreed there was a “correlation”.
Now for a bit of bad news. The largest gold exchange-trade fund, SPDR Gold Trust ETF (GLD), owns over 1200 tons of gold. That makes it the sixth largest gold owner worldwide and by far the largest private owner. If the gold bust continues and investors start fleeing gold ETF’s in droves, these funds will have to drop physical holdings. Meaning they’ll start to sell physical gold they have in their vaults. GLD alone has enough to literally flood the market, not to mention all its competitors. If GLD decides to sell 200 tons, price will drop by a fair margin, even if it’s all scooped up by a large buyer like China or India. Panic alone will force the price down quite a bit before it reaches a “liquidation level”. I wouldn’t be too surprised, if this correction continues, to see gold reach $1200/oz or even $1000/oz if other ETF bubbles (oil for example) pop in the meanwhile.
Something becoming more affordable is good news.
Why would a political philosophy be able to explain an economic event?
I don’t think it would, but it would be interesting to hear the opinions. I think psychology would better explain the behavior of prices.
Then why are you asking for a “libertarian explanation”?
It’s like asking for a capitalist explanation for the number of moons orbiting Saturn.
I read that 3bil in holdings at the comex were removed. Not sold, just removed, by JP Morgan and . Then came the Cyprus thing. And of course goldman is talking down gold, predicting new lower-lows.
http://bullmarketthinking.com/comex-gold-inventories-collapse-by-largest-amount-on-record/
And something similar went on with silver. Max Keiser is actually doing a decent job on keeping up with it.
supply and demand you fool!
http://www.youtube.com/watch?v=2Si9AaWVbak&feature=player_embedded
For a little more on the matter.
How about: “what goes up must go down”?
Regards, obf.
Not if you’re in free space.
Here’s what I said recently over at the Daily Bell about the drop in gold prices:
"As I have been saying for years, both here and elsewhere, nobody can know for certain what lies ahead for the economy, investment markets etc., despite what various investment advisors, economists [“Austrians” and “free market” economists included], central banksters, tea-leaf readers etc. might claim. The financial future is inherently unknowable, except perhaps in the most generalized terms.
Because the economic future remains largely unknowable, there are, as far as I can see, two reasons for owning gold:
1] [The most important reason] : As a part of a fully diversified, non-predictive, long term savings plan.
That is, gold [bullion] makes up an always fixed, pre-determined percentage of an individuals long term savings plan. A long term savings plan is for money that an individual cannot afford to lose, [i.e. not for speculations ] - gold bullion is an important part of such a non- speculative, non-future-predicting, plan.
2] As a speculation, or bet.
That is, an individual who has money they can afford to lose, would perhaps buy gold [or whatever] with the money they can afford to lose. Under those circumstances the individual buys within a certain price range [perhaps based on fundamental or technical analysis], and then stays “in” as long as the speculation makes money, and gets out automatically via stop-losses that are automatically triggered when the price drops by a pre-set percentage .
Question: Are You Investing, Or Are You Really Speculating?
As I see it, the biggest problem for most individuals is that they are really speculating [i.e. using money they cannot afford to lose to place bets for expected profits], when they think they are investing, and so are psychologically unprepared for significant market drops and must therefor “chicken out” of whatever they “invested” in.
See: “The Golden “Bubble” - Time to Buy, or Sell?” :
Regards, obf.
What are your thoughts. Deflation threat? Evil banker smackdown? Cyprus situation resolved?
It seems to be “Crimex”-related.
If I had any money I would load up on phys while the “Crimex” patsies are stuck holding the bag (i.e. gold claim checks).
@JJ: +1
@OP: I’m going to answer anyway because this is a topic worthy of discussion.
Of course, we never fully know all the whys and wherefores of anything as large and complex as “the gold market”. However, I think there are two fairly big reasons that explain most of the drop:
a) Gold prices have been due for a correction ever since we passed the 1700 mark - not because gold cannot rise higher but because investors inevitably become skittish with untested highs and it turns into a self-fulfilling prophecy. Marc Faber was calling a correction in gold since early 2012, he even recommended some limited move into equities as he expected them to perform better than gold (blasphemy!) Now that we’ve had this correction, it is a time to buy buy buy. Buy as much physical as you can get your hands on while the getting is good. Take a second mortgage if you have to; you will pay it back with plenty of interest left over within a year.
b) This is partly a corollary to (a)… financial advisors have been telling their clients since 2008, “You should be putting 5-10% of your portfolio into gold” as part of the “high-risk” portion of their portfolio. A lot of these people are retirees or on the down-slope to retirement… they have a very low appetite for risk. When you have instability such as Greece or Cyprus, these fair-weather gold investors run for “safety” in cash or bonds.
@OBF: You’re completely off the mark
Gold is not an investment, it is hard money.
Even the modern conception of “investment” has been thoroughly corrupted, as evidenced by the idea of mutual funds, particularly index funds. An index fund is nothing more than an inflation tracker (and that only during the good times). You’re not investing, you’re just discounting the effect of the rise in CPI on your savings. An investment is always the purchase/production of capital goods (producer goods) on the basis of speculating that greater productivity in the chosen market is possible, at a profit*. The extension of credit for this end (venturing) can only be done sanely by the detailed understanding of the creditor of the business he is venturing on. In other words, the venture capitalist is the investor… the capitalist/CEO is merely a manager/visionary.
We have it all backwards, we think the capitalist/CEO is the investor and the venture capitalists (shareholders) don’t need to know anything in particular about the business. What rubbish. And then we get into the whole rat’s nest of the stock-share scam… common stock sahres are not ownership shares in the business, in my view. They are not even secured in bankruptcy liquidation. If they were, they would entitle the shareholder to certain guaranteed dividends based on the profitability of the company. Of course, this is not possible even for dividend-bearing shares because the vast majority of shareholders are not entitled to inspect the company’s books, so they have no way to ensure fair play in the handling of revenues, costs, profit and dividend calculations. In other words, the common stock holder is playing “hot potato” or “the greater fool”, while even the dividend stock holder is at the mercy of the board of directors, senior management and the other major shareholders. In other words, the whole modern model of what investing even is, is completely broken.
tl;dr: “Blind” investing is not investing, it’s just gambling by another name. It is made possible courtesy of the Fed+NYSE which, taken together, constitute a gigantic counterfeiting and money-laundering syndicate. Sure, your assets will rise with inflation - all boats rise together and the closer you are to the source, the faster your boat will rise vis-a-vis everyone else’s. Buying gold is not an investment by any measure. Holding gold is also not speculation unless we mean that holding dollars is also speculation. In this sense, we are talking about the relative propensity of non-monetary goods versus monetary-goods to rise in value more quickly. In general, the fluctuations in the relative value of gold and other non-monetary goods are milder than the fluctuations of fiat currencies. In other words, if you’re just trying to “hold onto what is yours”, gold is the place to be.
Clayton -
- Speculation is often mis-labeled “investment”… speculation is not investment, it is a kind of asset allocation in time, I call it “peddling over time.” A peddlar buys things from people who need them less (at a lower price) and re-sells them to people who need them more (at a higher price) and, by facilitating the reallocation of resources from those who need them less to those who need them more, he makes a profit. The speculator is nothing but a peddlar… in time. He buys things that are needed less at time A (at a lower price) and sells them when they are needed more at time B (at a higher price).
Are you Wile?
Clayton -
You’re confused by the financial and the economical meaning of the word investment.
Gold is not investment to the economist because there’s no capitalization. Only a commodity and a dude that sells and a dude that buys.
But it is a financial (speculative) investment to the dude that buy if he is expecting its price to rise before he sells it again.
You’re right about time peddling but peddling is a form of using private information and willingness to assume risks in order to make profits.
About buying a stock index, it is a financial investment, but it becomes investment in the “economist” sense if you follow the thread of effects.
Yes, it does not necessarily means more capitalization when a chap buys a basket of stocks because another chap sold it to him. Therefore, this type of “investment” is associated with the “disinvestment” or liquidation on the other side of the transaction, and the total capitalization in the economy remains the same, right?
Not quite.
Say you and a bunch of other guys want to enter the stock market. How you’re gonna do it? You need to outbid the current ask prices, pushing the stock price levels up.
And by doing that, you just helped these companies because now they can raise more money by issuing new equity, and/or get better credit evaluations on their bonds, which can be used to cancel extant expensive debt (issued when the company market cap was lower).
The net effect so is higher capitalization and more investment, insofar as at least a part of this new money on the hands of the company executives gets transformed in new capital.
And it came from your delayed consumption, not from the thin air 