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Panic and Rout Strikes Gold Market
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(April 13, 2013) Gold for June delivery dropped over $70 on Friday 4/12, touching down at $1,476.00 in afternoon trading at one point, after free-falling through every (former) support level that had held for the past 18 months. Retail physical sales were extraordinary for most gold bullion dealers, but selling volume on the commodity exchanges was overwhelming. Prices of silver, platinum, and palladium suffered similar fates. In short, the bears triumphed.
Where this gold market is going next week, this month, and the rest of 2013 is anybody’s guess, but sentiment by the end of the day Friday could not have been more negative.

The Wall Street Journal headlined that “Gold Sinks Into Bear Territory,” on Saturday April 13, in an article by Christian Berthelsen, Tatyana Shumsky, and Gregory Zuckerman.

The WSJ article pointed out that “…on Wednesday, Goldman Sachs became the latest player to sour on gold, lowering price targets and saying a rebound in prices was ‘likely several years away.’”

At this point, it looks like gold has gone over a cliff. Gold has always been sentiment-driven, and now…sentiment has changed.”- StephenKlein, AT Global Capital, quoted in the WSJ.

On the other hand, in that same article, John Reade, a partner and gold strategist with Paulson & company, made the basic case for gold:

The recent decline in gold prices has not changed our long-term thesis. Federal governments have been printing money at an unprecedented rate. It is this expectation of paper currency debasement which makes gold an attractive long-term investment for us.”

Of course, the causes of this dramatic move in gold are many and debatable. Cyprus (rhymes with crisis) was said to be considering the sale of some of its gold reserves. There was tremendous selling of gold as the Comex opened on Friday (Merrill Lynch this time, selling some five million ounces, it is said). A another factor about mid-day was the release of a US government report that showed wholesale prices fell in March at the largest pace in the past ten months.

Sometimes, of course, markets just go down – often violently.

Over the past 18 months or so, spot around $1525.00 was a key level to watch, as gold prices had always rebounded from that area, with bargain-hunters consistently scooping up the yellow metal at around that price. This time, gold blew right through that former support, trading down into the $1470s before the end of electronic trading on Friday.

Much of this volatility can be attributed to fundamental changes in gold investing, i.e., the growth and popularity of gold ETFs over the past few years. Investors can now acquire gold positions easily by buying units of GLD (one-tenth of an ounce) through their online accounts, instantly and conveniently during the trading day.

As recently as August of 2011, the volume of gold held by GLD (SPDR Gold Shares) was over $77 billion worth, some 41 million ounces (over 1,200 metric tonnes), or nearly half the amount of gold mined worldwide in a year. That is a formidable amount of investment in physical gold. Since that time, GLD stocks have been reduced by hundreds of tonnes as investors sold off their positions, actions which put an enormous amount of physical gold back on the market.

Before there were gold ETFs, gold investors who were not interested in gold mining stocks, either singly or in gold mutual funds, would usually just purchase gold bullion outright. For those who buy physical gold, it is usually a long-term hedge, or insurance against inflation - or just because they see in gold a real asset worth acquiring and keeping, possibly forever.

The introductions of gold ETFs, through which the buying and selling of gold could be done with a keystroke, brought in new gold buyers whose interest was not in holding the shiny yellow stuff in their hot little hands and squirreling it away as a long-term insurance against future contingencies – more often, they just wanted to trade the market. As fast money plays with electronic gold, things can now happen in a hurry.

But even though gold ETFs are now a significant factor in the gold market, the fundamentals of supply and demand still hold true. On Friday, there was a lot of gold sold in the market, with not enough buying power to take it all on, and gold fell with a heavy clang.

The bears pounded the gold bugs to a pulp Friday,” – Trang Ho, in Investor’s Business Daily4/15/13.

True enough. But many fans of gold (even 'gold bugs') are value buyers, always looking for an opportunistic purchase. And the bright side of this panic is that it throws a "5% off" gift coupon into everyone's lap. So if you've been thinking about buying precious metals, here's your lowest price in nearly two years. Even though Goldman Sachs' analysts may say they can predict gold's future for the next "several years," it ain't necessarily so.

Of course, on Friday the 12th, many of us long-term gold holders were reminded that "Some days you’re the windshield, and some days you’re the bug.”

-Richard Smith, April 13, 2013

 

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