Skip to comments.Why Gold's Decline Is Accelerating?
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.
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?
Did this article answer that question?
I don’t play at that level, but I have often wondered how many people who are involved in the buying and selling of gold actually have their hands on the metal involved.
Not too many if this story is any indication.
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?
Not exactly rocket science to think that trading in paper like that, given the perilous state of the economy the world over, is a very dumb idea.
This can’t be right, G Gordon Liddy and Glen Beck are still pushing hard.
Look what happened in late 2008 when markets in general were tanking. Gold went down for the same reasons it is going down now. However, afterwards the fundamentals took over and fiat currencies continued their long term slide against a real store of value: gold.
5 year history of gold prices:
F&A will be the best investment if the economy completely fails. Food & Ammo
Call me a skeptic, but 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!
I am most concerned by copper and the base metals. This shows a big component is pessimism over the economy for the short term. Gold amd silver will not bounse back easily from this one.
During 18 of the last 22 years, gold has rallied between US Labor Day and Christmas. Will the pattern this year follow the historical pattern? We will analyze the fundamentals, look at some charts and try to draw a conclusion. The charts in this report are courtesy Stockcharts.com unless indicated.
A real QE3 is around the corner. Then, Gold will take off.
You remember when we started talking about this. I think Gold was at about 450. Let any real-estate weasel in the world come in on this.
I’ll take reason #5, Alex.
There was lots of panic-buying and it drove up the price. The price is falling now only because people are erroneously questioning their panic. The sky hasn’t fallen. Yet.
Buy, buy, buy.
Lancey, I don’t know ya but you seem to be good guy. I think it is getting high and a turn is looking us square in the face. Unless it drops below 350 I am OK. For all of you speculators, be careful.
On the bright side, if it keeps this up, we won’t have to worry about confiscation! ;)
Copper and oil both appear to be warning the markets that a global slowdown is underway. Equities are also signaling this as the Dow (NYSE:DIA) just finished 6.4% down this week, its worst week since October 2008. Furthermore, copper and oil are signaling that investors have lost confidence in the Federal Reserves ability to stimulate the economy through Operation Twist.
Whew! I wasn't looking forward to that blood-bath.
Agreed. And whether it’s gold or anything else, never go “all in”. Personally, I find guns and rifles to be excellent investments that hold their value. And always, a patch of fertile land makes sense.
You are not allowed to pull the curtain, the great wizard will see you when he feels it necessary.
Gold is still in a bull market. If you study the price and volume action of gold from a technical analysis standpoint, this short term correction was very predictable.
The speculators have been flushed out and gold will resume it’s rise. Nothing goes straight up.
I had two deer within 20ft of my kitchen window, but sometimes I just like to see them.
LOL did they find more paper and ink?
Silver down $3 tonight. Usually Asia trading is steady. The velocity of silver declining is stunning. Usually on that Kitco silver chart people post, the horizontal bars are scaled to twenty cents or even ten cents. The past two days they have been scaled at $2. People have to know that to judge on these charts how drastic this fall really is.
Well, I'm not too sure that we've dodged a blood-bath. In fact, it's looking more and more probable. It'll likely be over food and other essentials instead of gold and silver though.
It’s a blip. Gold is still na excellent hedge aginst inflation. Long term, it is not going down.
That is one nasty looking chart. Margin buyers are feeling the downside, some are looking for a window to jump out of right about now. Ugly.
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.
Undoubtedly, silver will pause at even numbers of dollars, but that would appear to be only temporary. If silver goes back to where it started going parabolic, which is where frenzies often go to, we could be talking about $15.
Low twenties = very easy.
Imagine how The Donald feels about excepting $160,000.00 in gold just a week or two ago. (Not that he has to worry about it...small drop in the bucket.)
That's my thinking too...
AGQ is a double levered silver ETF. It uses leverage to double the price movement of silver. People who have held that over the last three days have seen an over 50% drop in the stock price. And we have already dropped $3 tonight, which will be reflected in the price tomorrow. Holders of AGQ could lose 75% or more in a week. What is particularly awful about trading metals stocks is that the underlying commodities markets are open when the stock market is closed. When a big move happens after hours, you are just stuck watching it helplessly.
Especially since hurricane Isabel sent that surge up the Chesapeake Bay, overwhelming my house & docks, and leaving all my gold somewhere out in the middle of the Chesapeake Bay....along with all my long guns, hand guns, and ammo.
Yeah, I’m no hunter but I have a couple of friends who hunt on my back wooded acres with bows. My wife tells them to get the deer with the azalea breath. I’ve caught them eating my tomatoes, too, and one time I caught one at my front porch gnawing at a Halloween pumpkin.
Actually, I’ve been reading that farmland is the next big thing, considering food prices all the hedge funds are going long on it.
Anyone that buys gold on paper is ready to step up to a real investment. Golden gate bridge stock.
Copper taking a dump means China is taking a dump. Euro union is is deep doodoo...dollar is taking a dead cat bounce. G & S is therefore weak. buy at the bottom.
I am still buying gold because nothing has changed. Nothing...
Not altogether certain these are a factor at the present time. True, they are un-backed and thus doomed to fail, but a dropping price actually helps strengthen them. Remember, nobody is actually taking any physical bullion out of the funds.
Huge factor at the present time! Main culprits are the hedge funds. Investors want money out, margin calls are ringing, Au and Ag are the only things they can sell and still book a profit.
Mixed. Investors can always liquidate some or all of their margin stocks (or the broker/dealer will do it for them). About the last thing most want to do is bail out of the one asset bound to rebound, especially in an instant (e.g. think Middle East).
On the other hand, the increased margin requirements at the Comex is indeed a factor, although much less of one since they have boosted them about a dozen times in the last few months. See Market Manipulation below.
Actually, gold is money, despite the Bernack's idiotic statement to the contrary. PM's are difficult to move (bulky, heavy, expensive to transport, etc.) and can be sold and then repurchased at a different location, but most of these transfers are made without disrupting the market.
This is a factor, but is probably overrated.
Technical analysis is most helpful when fundamentals are unchanging. This is not the case at the present time.
Without a doubt, many of the algorithms used by the hedge funds are firing off right now, but this will probably not be much of an issue for very long.
Inflation is rampant and virtually every developed country is monetizing vast amounts of sovereign debt. Deflation is not a problem at this time.
Commodities are falling because economic production is dropping - thus demand is, or will soon be, down substantially. However, this is not the case for PM's. Gold has limited industrial applications and silver's uses, while significant, are generally inelastic (e.g. medicine and antibacterial), or booming (e.g. smart phones and DVDs).
Banks and governments manipulate the hell out of PM's using numerous techniques, especially naked shorts. It's called the preservation of wealth effect. People panic when they see their currency trashed with respect to PM's. At the present time, the big banks are hung out to the tune of tens of billions in terms of paper losses and they are coming up on year end. Unfortunately, the price is dropping without knocking many leaves off of the gold tree (or in other words, the effect is temporary because they still have to come up with the bullion somewhere). Moreover, it looks like they are about to lose control of the market. Gresham's law anyone?
There is one of the largest runs in history going on at the present time as money is fleeing the European Community in advance of its collapse and the collapse of the Euro. For this reason, the Fed is printing a ton of money and "loaning" it to the ECB for the short term (until after the EOY banker boy bonuses). This is boosting the demand for dollars through the roof, and the price of gold is inversely proportional to the price of gold.
Rumor has it that several eastern European banks (e.g. in Poland and the Baltic Countries) are being forced to sell gold in order raise dollars. Maybe.
The Fed are masters at subterfuge. Bernack has denied QE3. However, they are printing money for liquidity (see above), are about to bail out the IMF (again), and are propping up European banks. They are indeed "twisting" some of their short term debt into longer maturities, but while this addresses the problem of paybacks, it no way addresses the problem they have with ongoing deficits of $100 billion per month and rising. The current "solution" of reverse repos applied to GSE trash with big banks acting as middlemen is ... by any other name ... printing money to boost bank reserves and fund deficits ... which by any other name is quantitative easing. And people are stupid enough to believe the Fed line ... for a while yet.
>>This cant be right, G Gordon Liddy and Glen Beck are still pushing hard.<<
They are pushing PHYSICAL gold, not pieces of paper. Keep buying the real stuff and secure it close by.
Gold up $60. so far this morning...I am buying the dip with more physical...I still think close to $2K by Christmas!
“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.
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
$28.47 right now
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.