For years, we have all seen advertisements on TV and in the newspapers telling us to buy gold. We’ve been told that it is a safe investment. For the past 12 years, for the most part, it has been, depending on how deep your pockets are. However, we saw on Friday, April 12th, that gold, at any given moment, can turn and drop fast and hard – just like all markets.
From the 70’s up to until about 2000, futures in gold were traded in London on the LME and COMEX. These markets were physically settled and deliverable contracts, a true supply and demand contract. When Gold started trading electronically it made it exceptionally easy for anyone or any fund in the world to buy, hold or sell gold. Then came the GLD, the gold EFT-
The GLD change the gold market forever. It made it so that the average investor could own gold in their portfolio without going directly into the futures market. The supply and demand on the psychical side was changed, and we started seeing gold rise more steadily and faster than it had in the past 30 years.
During my lectures and coaching sessions, I try to have my students visualize a market such as gold as a bucket that is being pulled to the top using a pulley. We have all heard CNBC, Bloomberg, and other networks use the term “Melt up.” Think of pulling the rope to get the bucket of gold coins up to the top. Now, think of a sell-off, such as the one we just saw in gold. The grip on the market loosens and the market starts the sell-off — think of letting the rope go and the bucket falling fast and hard. In your grandfathers gold market, there would be a point where the COMEX 100oz gold contract would find equilibrium. In the Electronic and EFT markets of today, however, the speed and depth of the down move is super-charged by the amount of people who now invest in GLD. Many of these people are the average traders who will not have pockets deep enough and be forced out once again, adding to the sell-off.
During the sell-off on Friday, one of the financial news networks’ anchor said, “when will this end?” I have commented in past blog posts that his famous line and others, such as “it has to bounce” or “this market has to recover” are fables. As I teach my clients, no it does not. This sell-off in gold might not be over.
There are still many people who are getting onto positions that, if the slide continues, will force them to liquidate due to margin calls. There are people who bought it at $100 or $200 higher, after hearing all last year on the financial news networks that gold was going to $2500. I would be very careful trying to pick a bottom in this market. It is a small market and due to electronic trading many average investors, who should have never been in this market, are starting to feel the pain on a position that has now turned against them. Some will hit the panic button, and there is just not enough product for everyone to get out without a major sell off.
When I traded gold in the COMEX pits, it sat between $500-$600 for years. This market has a lot of downside risk and now, on every rally, there will be natural sellers from traders and average investors who are caught at much higher levels. Most were caught off guard. Not everyone has the information pipeline that the big trading houses have. For example, Goldman looks like the hero again. Earlier this week, Goldman said they could see gold selling off. Then, on Friday, news come out from Cyprus that they are in the process of selling gold. Coincidence? Maybe. Maybe not.
How Low Will Gold Go? Listen to my interview on CNBC here:
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