Gold price collapses

Note: I had just about finished this post when the news came out about the terrorist bombing in Boston yesterday. Obviously that news took precedence. I will update that as I learn more.

There’s a bit of interesting economic news coming out. It seems that the price of Gold is collapsing, and in a major way. It isn’t just gold, but all the precious metals are heading for the cellar.

Now I don’t own any gold, silver or other metals. I’ve considered it and have looked into buying some. One thing that has held me back was the high cost of getting it. Looks like my wait may not have been in vain. Here are a few details from Reuters:

Gold headed for its biggest two-day drop in 30 years on Monday as funds accelerated their exits from the market, and investors also cut exposure to oil, copper and grain after underwhelming Chinese growth data.

The precious metal slid further into bear territory, dropping more than $30 in a matter of minutes at one point. Losses widened to more than 6 percent at the lows as prices breached support at $1,400 per ounce after falling 5.3 percent on Friday.

Now one thing you should key in on is the word is “Investors.” One of the reasons the prices when through the roof in the first place was investors and money managers buying up futures. This means they were buying paper and betting that the prices would go up. They were NOT taking delivery of the physical metals.

Gold was already under pressure from a variety of factors, including a proposed sale of Cypriot gold holdings, and more fund-based investors headed for the exits on Monday.

Spot gold hit a two-year low at $1,384.69 an ounce.

“We have seen massive liquidation from all quarters – ETFs, funds, CTAs, specs and even Chinese and Indian physical buyers. This is a market that has only got one thing on its mind … get me out,” said David Govett, head of precious metals at Marex Spectron in London.

This is called a Panic Sell. The investors, who bet on prices going up, are now in the process of getting their heads handed to them. Personally, I’m going to sit back and enjoy it.

In gold, “what we now see is panic selling, perhaps triggered by the Fed’s stimulus view. The Fed has given the signal that there’s a possibility to reduce QE (quantitative easing), and that took a lot of trust out of gold,” said Dominic Schnider, an analyst at UBS Wealth Management.

“And people recognize that an environment where you have no inflation is a powerful driver to get out of the metal.”

One of the reasons people buy gold is to have a hedge against inflation. Ben “The Bonehead” Bernanke has been printing money like there’s no tomorrow. The idea was to pour cash into the economy so that businesses could borrow and expand. What he failed to understand is that businesses, at least the big ones, are sitting on mountains of cash. They aren’t investing in their businesses for one simple reason.

Obama.

They don’t have a clue what the SCoaMF is going to do next. Since they can’t plan out what their potential expenses might be, companies are pulling back and waiting to see what Der Fubar does next. Getting money for expansion was never the problem. Another issue are those investors who bought gold contracts on margin. From the Wall Street Journal:

Gold for April delivery, the front-month contract, was down 8.6% at $1,372.10 a troy ounce on the Comex division of the New York Mercantile Exchange at midday in New York, its lowest price in more than two years.

Traders said part of the plunge in prices was a result of investors choosing to sell gold instead of putting up more money as collateral to keep their wagers open. Traders typically put down just a small percentage of a gold contract’s full value in order to trade it, and this amount, known as margin, must be increased when prices fall.

Margin calls were one of the major problems when the Stock Market crashed back in 1929. Back then, it wasn’t unknown for investors to borrow up to 90% of the money they invested. Here is a better explanation from Investopedia.

Here’s how it works. Let’s say you purchase $20,000 worth of securities by borrowing $10,000 from your brokerage and paying $10,000 yourself. If the market value of the securities drops to $15,000, the equity in your account falls to $5,000 ($15,000 – $10,000 = $5,000). Assuming a maintenance requirement of 25%, you must have $3,750 in equity in your account (25% of $15,000 = $3,750). Thus, you’re fine in this situation as the $5,000 worth of equity in your account is greater than the maintenance margin of $3,750. But let’s assume the maintenance requirement of your brokerage is 40% instead of 25%. In this case, your equity of $5,000 is less than the maintenance margin of $6,000 (40% of $15,000 = $6,000). As a result, the brokerage may issue you a margin call.

If for any reason you do not meet a margin call, the brokerage has the right to sell your securities to increase your account equity until you are above the maintenance margin. Even scarier is the fact that your broker may not be required to consult you before selling! Under most margin agreements, a firm can sell your securities without waiting for you to meet the margin call. You can’t even control which stock is sold to cover the margin call.

If you would like to see what happens when a margin call is made, and you don’t have the money, watch the end of the movie “Trading Places” with Dan Akroyd and Eddie Murphy. Just understand that what they and their antagonists leading up to the margin call were doing is highly illegal and will get you a nice long vacation in Club Fed.

Getting back to the plunging prices, just how bad was it? Back to the Wall Street Journal.

The depths of Monday’s selloff at one point exceeded the one-day percentage decline of 9.6% on Feb. 28, 1983. Gold prices fell 11% on March 17, 1980.

“All of a sudden, the price is below $1,500, and you have to put up more money,” said Jeffrey Christian, chief executive at metals-consulting firm CPM Group. Faced with such choices, more and more investors are choosing to dump their gold holdings rather than risk riding out the selloff, he said.

“I’m sure there are a lot of margin calls being triggered and positions being blown,” said Bob Haberkorn, senior commodities broker with RJO Futures.

And here we have another phrase you need to know about. “Gold Holdings.” These investors almost never actually take delivery of the gold they contract to buy. One of the things I’ve heard in the past is that there actually isn’t enough physical gold available to cover all the contracts if they were actually exercised. Of course, there are people who did take physical possession of gold bullion.

“Everybody that’s bought for the past two years, since April 2011, is losing money,” said Ira Epstein, director of the Ira Epstein division at the Linn Group futures brokerage. “It’s a sea of red,” he said.

I worked with a woman who bought a one ounce gold coin. She paid $1700 for it since she bought it at the top of the curve. She’s been kicking herself ever since. She wasn’t the only one who was caught by surprise.

The fall took some by surprise, with Singapore-based traders saying they hadn’t been prepared for the heavy losses. While China’s growth data is always keenly watched, it seldom causes such large moves in gold and other markets.

Fears of a slowdown in Indian buying come at a crucial time, as the peak wedding season is kicking off—traditionally when consumers buy gold ornaments for gifts to brides.

“Some seasonal buying is there. due to the wedding season. But the demand is thin,” said Haresh Soni, chairman of the All India Gems and Jewelry Trade Federation. “People aren’t comfortable entering the market now. They will wait for some more time for the rates to stabilize.”

For those buying gifts and jewelry for brides, the price drops are actually a good thing. They can spend less and get more.

Mohit Khamboj, president of Bombay Bullion, estimates about 1½ tons of gold will be sold daily by long-term investors in Mumbai alone. That is a sudden shift from two months ago, when Indian investors were bullish and buying.

“Gold investments are increasingly looking like a bubble,” said Mr. Khamboj.

And I would agree with that statement. I thought the price of was way to high when it went through $1200 an ounce. While I am no expert, I would guess that gold really shouldn’t be much about $1000 an ounce. Basically, we’re seeing a repeat of the housing bubble that popped back in 2008. The difference with that bubble is it was completely avoidable and was caused by the likes of former Representative Barney Frank ((Barnett “Barney” Frank)). The discussion and coverups have been talked about for years, both here and elsewhere. The prices of gold, while they can be affected by government policies, really can’t be rigged the way the housing markets were.

As I mentioned earlier, gold, silver and other metals and commodities have always been considered a hedge against inflation. However, since inflation isn’t going up at the rates they should be, considering how the printing presses are being burned out from overuse, something else must be happening. From Reuters:

Gold was under pressure from a variety of factors, including a proposed sale of Cypriot gold holdings, and more fund-based investors headed for the exits after China’s data on Monday.

China’s economy grew 7.7 percent in the first quarter, undershooting market expectations for an 8.0 percent expansion and frustrating investor hopes that the world’s No. 2 economy would rebound after posting its weakest growth in 13 years in 2012.

Cyprus unloading it’s gold reserves isn’t a surprise. Even though they stole all the depositors money to pay for their bank failures, it isn’t enough. China’s economy has been running at 10-12% for years, but with the general collapse of the world economy in 2008, and the utter incompetence of world leaders in understand why it happened, no one is buying anything they don’t have to. China may have missed this and it’s going to really slam them down the road.

Gold is and always will be a valuable commodity. People have used it as a means of payment for goods and services for thousands of years. It’s only recently that nations have abandoned the gold standard, primarily so they could spend money with abandon. Now, even that has reached the breaking point.

I’ve been told there is something like 8000 TONS of gold in Fort Knox, plus another 300 tons in New York City. There’s always been talk of having the United States going back on the gold standard ((The Gold Standard)), but the amount of gold we have wouldn’t cover the amount of Dollars in circulation. There are a hot of other issues as well and I am certainly no expert in it.

With the price of gold collapsing, Investors are bailing out before they get slaughtered financially. People who bought and took possession of gold bullion and coins will not get hurt unless they also panic and try to cash in. From what I’ve heard, physical gold and silver owners didn’t buy the metals as an investment. They bought it as protection in case the value of currency drops below that of toilet paper. They will simply ride out this bursting bubble and look at picking up more gold at a lower price. They know it will eventually go up.

Thatisall

~The Angry Webmaster~

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