Posted on 09/25/2011 9:12:15 PM PDT by blam
Why Gold's Decline Is Accelerating?
Commodities / Gold and Silver 2011
Sep 25, 2011 - 04:34 PM
By: DK Matai
"The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences."
That was Churchill in a speech to the House of Commons at the Palace of Westminster in London on November 12, 1936, as the clouds darkened over Europe. Dark clouds are hovering once again in regard to the euro, eurozone sovereign defaults and an interlinked banking crisis. More than $3.4 trillion has been erased from global equity markets last week, sending a prominent world index of shares into bear market territory, on concern that governments are running out of tools to avert another deep recession.
As the global financial crisis gathers momentum, why has gold dropped 15 percent since reaching a record $1,923.70 an ounce on September 6? Also, silver has plunged the most since October 1979. In two days, gold dropped 9.3 percent, the most since February 1983. The weekly decline of 9.6 percent was also the most in nearly three decades.
These are the possible fundamental causes for the accelerating decline in the price of gold:
1. Exchange Traded Funds (ETFs)
The UBS rogue trader, who caused the chief executive of UBS -- Oswald Gr�bel -- to lose his job over the $2bn black-hole, has accidentally highlighted the problem with ETFs. As the recent ATCA briefing, "Are The $1.4 Trillion ETFs The New WMDs? Anatomy Of The Highly Toxic UBS Scandal" points out:
"Think of all the gold ETFs and then ask yourself: How much physical gold actually underpins the gold ETFs? Answer: Not a lot! As much as half of the trades in gold are now driven by ETFs, while some blame them for speculatively driving up [commodity] prices."
Top gold sources say that some ETFs are involved in fractional selling in ratios of 1:100 and there is only 1 kilo of gold for every 100 kilos of gold-equivalent ETF units which are sold and re-sold. As queries for physical gold repatriation start, gold funds and myriad financial institutions and shadow banking vehicles -- such as prominent hedge funds -- may keel over?
Attention is just beginning to gather on the accounting principles of the popular but tainted gold and silver Exchange Traded Funds (ETFs). The gold inventory is under scrutiny for usage in COMEX -- Commodity Exchange -- deliveries, enabled by questionable shorts to the GLD and SLV shares by its own custodians. The Bar Lists are regularly seen as erroneous and suspicious.
The biggest gold and silver funds are now on the defensive, as they may soon face mass investor exits on the back of heavy discounts to the precious metal spot prices and doubts about the levels of physical gold they actually hold.
2. Paying for Losses and Booking Profits
There is clear evidence that investors are selling gold to pay for massive losses in other asset classes like equities and commodities. In parallel, many investors have made a solid profit in their gold-linked investments. As the markets crash and there is a need to find ready cash and report profits, it is easier to do so by selling their hitherto profitable gold positions.
3. Source of Liquidity and Margin Calls
Gold has become the source of liquidity for global margin calls. It is difficult to say at what level this liquidation will stop. COMEX -- Commodity Exchange -- is making it more expensive for speculators to trade. CME -- Chicago Mercantile Exchange -- Group has increased the margin requirements on gold and silver. The minimum cash deposit for gold futures will rise 21 per cent to $11,475 per 100-ounce contract in the speculative Tier 1 category at the close of trading on September 26, Chicago-based CME has said. For silver, the minimum cash deposit has been raised to $24,975 from $21,600.
4. Flight to Cash
We are seeing a flight from illiquidity to liquidity, ie, from all asset classes -- including precious metals -- to cash because 2008 is still very fresh in people�s minds. In October 2008, gold prices tumbled 18 percent as the most-severe slump since the Great Depression spurred losses in global equity and commodity markets. However, the yellow metal jumped 23 percent in the next two months.
5. Too Fast Too Soon
The summer run-up in the gold price was too far too fast and too soon as institutional speculators extended their long positions in paper derivative markets. All these tell-tale signatures suggested a big fall at some stage, which has now arrived. Rather than any dramatic reversal in world physical markets, it looks like gold's precipitous price decline in recent days and weeks can be attributed at some level to the same set of speculators -- including some prominent hedge funds and the trading desks of the big Wall Street, European and Asian banks -- reversing their positions or cashing out of gold altogether.
6. Deflation and Commodities
Slowing world growth has created pressure on gold and commodities from the deflation angle. The broad slide in commodity markets also helped drag gold lower, as declines in the commodity indices prompted managers to liquidate gold.
Conclusion
The fall in the price of gold at a time of increased global uncertainty can be counter-intuitive for some investors to understand. Of all the reasons cited for the accelerated decline in the price of gold, knowledgeable senior executives -- with board level responsibilities in gold mining and gold bullion trading -- suspect that worries about Exchange Traded Funds (ETFs) and investors pulling out of their leveraged gold positions are amongst the most likely suspects. The increased margin requirements may still be a minor contribution but would likely cause a further modest dampening of sentiment.
Is this a short-term or long-term correction? Could the correction in gold prices be short-term and similar to initial losses suffered in 2008 or is this a more long-term correction like the one in the early 1980s that lasted for more than two decades? The length of the fall in gold prices depends perhaps on how long will it take for the ETF situation to normalise!
Some senior executives from the gold industry feel that the long-term upward trend in the price of gold is likely to continue because physical supply from new production is very limited and the overhang from central banks pretty securely locked-in for the moment. This leaves open the question that how long will the transition period of falling gold prices be before the long-term trend resumes?
“I had two deer within 20ft of my kitchen window, but sometimes I just like to see them.”
I like to see them too ... next to my mashed potatos and green beens. Um, um, um.
What do you get when you buy common stock? Keys to the front door of Boeing headquarters?
A real QE3 is around the corner. Then, Gold will take off.
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The $2T Greek bailout will be funded by the FedRes/IMF ,, that IS QE3 ...
The current drop in gold is due to reason #3 ,, margin calls , selling for needed liquidity ... Margin requirements on commodities were pumped up right at the time all other assetts were falling and causing margin calls .. a guaranteed way to cause selling.
Sell your gold ,, or not ... doesn’t matter to me .. but this is an engineered shakeout ,, for the central banks to get a better buy-in price ,, that is all .
$1610 gold price right now
$1915 was the peak interday gold price a few weeks ago probably September 6th
SILVER
$28.47 right now
SILVER
Peaked near $50 a few months ago
“So what do you get when you buy gold? A fancy piece of paper that says you have gold reserved in your name somewhere in a vault in other state or country?”
I’ve said it on other posts on FR. When it comes to Gold and Silver if you can’t reach out and ‘physically’ touch it then it’s not under your control. And to my way of thinking it isn’t ‘real’.
To my way of thinking in many ways the Gold and Silver commodities market is much like the Mortgage backed securities market. There is a small core that is ‘real’ and backed by ‘real’ assets the rest is all smoke and mirrors.
I think I am looking at it from a different angle than you.
My thought was that the purpose of buying gold was to have something of tangible value that would retain value even if the world goes to crap around you. In that case, only the actual metal is going to be worth anything.
I guess if you are looking at it as a regular investment... something to make money on or at least hold value as long as the system stays intact, a bearer bond type paper is good enough.
If the world goes that far into crap, then bits of shiny metal won't be of value. Canned food, seeds, ammunition, bottled water, fuel, and weapons will be of value. You'd be better off laying in a supply of cheap Hi-Point 9mm handguns ($165 suggested retail) and 9mm ammo (<$12/50rds) for trading purposes.
Physical gold will protect you from a shady hedge fund that goes under because they sold too many paper certificates. Buying S&P GLD SPDRs is, IMHO, not the same thing.
What happens to these hoards of physical gold if a future US Government pulls a "Roosvelt II" and bans private ownership of bullion, and forces government purchase at a fixed paper dollar rate?
Most “buyers” for the past 500 pts. or more are herd followers who got hyped “in”. They're getting out now in droves, but more to come soon as they are the ones who ALWAYS bail when anything upsets them - same ones that sell their stock funds/etfs near the bottom.
Sorry, gold is not going to the moon, it's tanking and will tank faster if there is any rally in stocks. All you have to know is that it was being power-sold and promoted all over the place to know there are MANY owners who are not “believers”. They go in because “they had to” or they'd miss “the next great thing” just like they piled on tech stocks at the end of the 90’s. Another classic bubble and burst.
if I did own gold I would like to have the genuine article in a safe place. And that is the problem...where would that be!
The answer is different for everyone, and for any individual, there may be multiple answers.
First, consider diversification, don’t put all your Krugerrands in one basket.
Home security safes, back-yard (or public land) buried stashes, allocated private storage, bank safe deposit boxes, and hidden household spots each have their benefits and risks.
My general thinking is that you’re better off burying your gold under a potted plant in your family room than under a tree in a national forest. My course has a bunch of other suggestions.
Long term, it is not going down.
There are lots and lots and lots of “late-to-the-party” holders of both silver and gold. There will be panic selling for a while here. That is a reality.
I am still buying gold because nothing has changed. Nothing...
A very good post. As a small aside, I believe DVDs and other such discs use aluminum, not silver.
I don’t know for certain, except that if there were silver in them, they’d be recycled.
>>If the world goes that far into crap, then bits of shiny metal won’t be of value. Canned food, seeds, ammunition, bottled water, fuel, and weapons will be of value.
We agree in principle, but gold has always held value, at least until the crisis has ended. And if you are fully stocked with guns, ammo, and food (say your garage and basement are full) what do you do if you have $100,000 in savings to secure? What if you’re worried about having to relocate, and bring some wealth with you?
>>What happens to these hoards of physical gold if a future US Government pulls a “Roosvelt II” and bans private ownership of bullion, and forces government purchase at a fixed paper dollar rate?
The answer is that you get paid in full at the current rate with those dollars, just like before. Of course, the dollars you receive (along with everyone else’s) can be debased, but that fact that you benefited from owning gold for a finite period doesn’t mean it should never have been bought.
I have a lot of other reasons why I’m not worried about a ban and buy-up of gold.
Most “buyers” for the past 500 pts. or more are herd followers who got hyped “in”.
I suggest you consider foreign nations, central banks, the big funds, China, India, and those who are actually doing most of the buying. They don’t watch Glenn Beck.
Aluminum won't work for DVDs ... not reflective enough. Given its relatively high cost (several dollars per ounce vs. a few dollars per pound) almost all of Ag's commercial applications depend entirely on its unique properties.
Not enough Ag to be economical to recycle. Think twenty cents worth of silver that cost two dollars to get out.
A Freeper asked me what I think of this decline. My reply:
I think this is a great time to keep buying regularly. I
I think the fundamentals are there for a future rise. Gold’s steady 10-year rise (15% per year) would put it at about $1400 today, which I’m prepared for.
I’m intrigued by the notion that the Euros are panicking into the dollar, which is thus in a bubble of temporary strength, which makes commodities drop.
Aluminum won’t work for DVDs ... not reflective enough.
I also know that telescope mirrors are aluminized, not silvered.
My property taxes (On raw land) went down this year for the first time. The tax appraisal went down by 10%, though still about 20% above my original investment. Gold purchased at the same time has doubled in value even with the current correction.
The hype about "physical" gold vs "paper" is just that--hype fuelled either by cynical marketers who want to sell you bullion coins or bars, or ETF traders in short positions wanting to talk down their instrument of choice.
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