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Why the Big Drop in Gold? Understanding What Happens to Financial Markets
When New Economic Data Does Not Support Fed Policies, Submitted by John Bougearel of Structural Logic
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Greece on the brink of bankruptcy - no problem -
European taxpayers will bail them out.
i don't care to read 1 word of this
its very simple. market is pricing in rate HIKES and doesn't need to pump up hard assets like gold, copper anymore
the play will be the USD, Money Markets, Savings accountds for people like this who were playing gold as an inflation hedge out peformer
wake up to the reality or be SMOKED in your long gold positon. if you're john paulson you should be VERY scared right now
Why? He's in at 600, 700, 1000 and likely up at least 35%.
Probably much more factoring in options, futures trades, hegdes.
Rate hikes? How will we pay interest on our debts?
gold is one buy and hold position that will work out. just relax. a healthy correction is always a good thing. all i can say is that it is nice that this "correction" is happening at this very moment when the ppt needed it ....its gold bitches. its gold....
TWO WORDS: BUY OPPORTUNITY, BITCH.
I am Chumbawamba.
Bernanke might actually be using gold as the barometer for inflation, if so then why wouldn't he just keep rates low at least until gold matches its inflation adjusted high ? Then he can start fighting inflation at that point which will double the price again. I think this is how Peter Schiff arrived at his $5000 gold prediction
Gold dropped because Bernanke got spanked so bad in the confirmation hearings it made him have a temper tantrum.
That was just absurd theater for the naive. BB even laughed when told he was "The Creature from Jekyll Island". Don't watch or listen to what they say.
Need it be said again?
If their lips are moving......
Bernanke's burning question, after the banks are completely made solvent, is how do I tighten with the massive liquidity and MBS, in order to have a controlled transition towards moderate inflation. This is the $1T dollar question. The majority of econo-philes, myself included, feel that the transition will be uncontrollable. Resulting in 8% real inflation for at least one year at best, and hyperinflation above 10% at worst. Ben will tighten only after the banks are in good shape. Perhaps Q4 2010. I do not think he cares much about the price of gold in his strategy to tighten.
For all government purposes the economy was saved from depression and is rebounding. Even jobs are picking up. That's what the masses see on TV. [we know better but that's not my point]
Given the "rebound" (and the cliff drop ahead), if Bernanke is smart he should declare victory and get the fuck out really quick. Well, that's what I'd do. Vanity gets in the way of most academics but , as a person, I hope BB sees the door open and leave.
Bernanke's burning question, after the banks are completely made solvent, is how do I tighten with the massive liquidity and MBS,
Especially when he is the one holding the MBS, and those MBS are what is "backing" the currency-thingies instead of Treasuries, and the entire world is aggressively lying about the value of MBS in general.
And it's a question we already have the answer for: He's shit out of luck.
We already saw what happened when Greenspan tried to raise rates. The market collapsed, he whimpered his "I found a flaw" apology in front of Congress, and then ran out of office with his tail between his legs.
The market is a petulant child and will collapse the instant rates rise. And Bernanke has no plan B.
They can't correct what they don't have, or can they?
Guess we will see.
BTW, why are the premiums over spot on 1 ounce coins over $100oz?
That seems strange, for some reason
I called a big coin dealer and their prices had risen 30$ on .20 french franc's in one month. 5$ over spot on one ounce .999 new mint silver. He said the toughest thing about his job now is finding coins to sell. This was this monday I'm waiting to see if things shake out more before I buy. I'm thinking there might be a big selloff after new years especially if xmas numbers look better then last years apocolypse!
It's a good read and right on several levels. Gold has to climb the wall of worry. I'm all for a correction, if it moved up in a straight line it would be fast/scary for people. You it constantly make new highs every day and people tend to get a littler jittery about a pullback.
sorry shameful, off topic, but I'm like a dawg wit a bone now. What about a class action civil lawsuit against the Fed for Breech of Contract, signed by 75% of Americans?
"You[yet?] it constantly make new highs every day and people tend to get a littler jittery about a pullback."
Except for the last 6 months...
Yeah little misspelling there. I've been ducking studying for a final and I'm starting to tired out :)
Well in the past 6 months it was not hard charging like it had been. It was moving up so fast even I was getting jittery. Not to sell but "OMG is the dollar really getting hammered that bad out there?"
I'm not all the way up on class actions, but technically the Fed has wronged all citizens so all would be able to qualify. Would be an amazing feat to get a lot on board. But I don't believe that breach of contract is the way to go. Remember American citizens and Fed Gov are separate entities. Any arrangement that the Fed Gov has with Fed Reserve is between them and we are just a 3rd party.
I'm also not that up on the exact language of the Federal Reserve act but I could see it as them granting power to the Fed so it wouldn't be a contract so much as a granting of government power to a group. Much like the Fed Gov does not have a contract with the IRS or the EPA. I understand the Fed Reserve is not a gov agency I was using the example to show a delegation of Congressional power to a group.
If we could show it as a contract then we would have to prove a breach. This might be harder then you think. The wording in legislation leaves a lot of wiggle room. We could probably nail them on buying MBS, as to me that goes outside their charter, but them we have to plead damages.
The problem with damages is we have to show economic loss. They could hit us on two fronts in that regard. They can try to show that it was an economic good even if it was a breach. The other problem is since damages are measured in dollars, and we are fighting about the destruction of that unit of measure I have no idea how a judge would even approach that.
Assuming we could get past the damages road, then they have to pay damages...but they have the printing press...So unless the judge ordered them not to print money they could just give the big "F YOU!" to America and spool up the presses to pay us for the rime of spooling up the presses.
You know what just hit me...I think China or Japan would have a better shot at standing then us. If the gov of China or Japan or any nation with US debt could sue for the damage done to their assets by currency devaluation. I don't see it happening but that is a strange thought. I'm not even sure there is any case law in this direction...
Shit I guess I have learned something in school, who knew?
Anyway I hate to sound like Mr. Negativity. Trust me my hate for the Fed runs wide and deep. I see them as the killers of America, the people who rob us all particularly the poorest and weakest among us. When I see poverty I see the Fed's hand in it. I'm more then willing to keep on this discourse and I haven't done a full research into it, but from what I see the Fed Reserve is bullet proof in court. I might have to fire up Westlaw during my "vacation" and take a look. We need to keep watching what happens with the Bloomberg FOIA request, I think it's moving into the Appellate Court now.
I still got to hope that HR 1207 will get a vote. The more people we can spread the word to the better. Showing that the Fed is criminal and killing America is easy, just not in court (the system does not work for the little guy). But once we get enough people we can try to put an end to the Fed. The Fed might very well go out in a blaze of dollar killing glory, but better a quick death then the slow torture!
you gonna shoot a dog with a slingshot, after it just mauled your kid, or are you going to go after it with something more powerful, and make sure it can't do it again. the gloves are off, we're way beyond asking them nicely to please stop destroying our future
oops my bad
TD - posts like this can't be read on moble and I'm using a pretty advanced phone - an android- not sure what to suggest by way of solution, but I'm sure a lot of people are like me a like to read news on a small device rather than be sadled in a chair or with a laptop.
Its true that the embedded scripd can't be read on droid but you can read the pdf. Click the link attached and then click the downloaded pdf and you can pick a program to open it with. BeamReader is quite good.
Why the correction? Does it have anything to do with the 90% plus bullish sentiment for the last 15 days? Or the ' buy the dipstick' mentality? Find me someone who sees $700 gold. That animal hardly exists. Looks like everyone's on the same side of the boat.
It only took 4 posts for a bear like you to show up so I am not buying that 90% bullish sentiment number. The bubble is in fiat, not gold.
So are you saying that because no one sees $700 gold, it's on the way?
I wonder why no one mentions that silver barely took a hit?
Silver has still not taken out its 08 high or its 80s high yet some people call this a PM bubble.
Regardless of what happens to the DXY, here's some simple math:
(Govt Spending + Interest on Debt) > Tax Receipts = Money Printing
Yes, it's that simple.
More borrowing you say? Hahahaha!
Exactly. Many want to obfuscate that simple fact, and many others won't answer the question when asked pointedly. Someone show me where the money is going to come from to pay the debt. If the debt won't be paid, then that is default. Somebody pick one, or show me the third way. All the other arguments about the "relative condition of various countries", and "will Bernanke raise rates", and blah blah blah don't matter a hill of beans.
Someone tell me where the money is going to come from in an environment of falling revenues and rising social spending demands, while our Nobel Peace Prize laureate president-thingy goes to war to establish his creds as a strong, wartime president, killing our kids for his political legacy.
Someone tell me what happens to the reserve currency if he admits defeat and brings the troops home; are our kids dying for a strong dollar?
Someone tell me they believe that actual unemployment decreased.
Since I was a little late on silver and a few lbs lite, I'm 100% ok with a hit/dip right now. Just sold a dream, now trying to buy a little future.
Silver futes sure took a hit!
I'll take a different perspective on the asset, and trade (to quote Paul Tudor Jones) that is gold. We know a lot more about the world's reserves of oil than we do about the world's reserves of gold. The former may be at a peak in terms of production, but the latter is a mystery.
Western China has been in a gold rush this year. Northeastern Burma is, too. I've seen the population of one of these areas rise a hundred fold this year as the gold price shot higher. A Chinese firm controls most of the mining areas in Burma's Kachin State, and Russian firms have one license in Kachin State and one in neighboring Sagaing. In the malaria and cobra/Russell's viper infested countryside, along major rivers sourced from the Himalayas, ethnic minorities and carpetbaggers are hard at work panning for grape sized nuggets and---like their Chinese and Russian counterparts---using recovery techniques that would make Greenpeace cringe.
I've watched long-tailed boats loading up with prospectors and their supplies, most of which are jerrycans of mercury and tins of potassium cyanide, then head up river in search of their fortunes. Many of the hopefuls will not return. Some will fall prey to dacoits, some to dengue and cerebral malaria, and many to their own stupidity and carelessness with the chemicals they are abusing to recover the gold. A few will come back with ten year's worth of earnings, which will encourage even more fortune seekers and more production. And these folks are not going to hold what they find; there will sell it for paper currency.
Oddly, spot gold in Burma tends to trade at a discount to world spot of about $10-20, while the local currency (backed by the full faith and credit of the military junta) has soared in value this year, outperforming the dollar, euro, yen, swissie, krona, rial---take your pick. All of them. In this one perhaps isolated case, fiat currency>Au.
I don't know if gold is money. That is semantics. I do know it is a store of value, however, and used the same as any store of value. In good times it is accumulated, and in bad times it is exchanged for paper such as yuan or kyat or ringgit, which are then used as the means of exchange to purchase the necessities of life. In most gold markets, it is common to see both purchasers and pawners at the same time.
Gold afficionados might lick their lips at the prospect of 1.35 billion Chinese catching the bug, but at the same time they had better be prepared if or when China's economy slows again and all of that gold comes to market looking for the yuan that will buy the rice, pay the rent or put gas in the car. It is not a one way street, nor is it a rocket ship to the moon. Yes, $5000/oz is possible, but so is $250. To reiterate the Tudor quote, "It's just an asset; it's just a trade".
Neophyte Americans, new to the gold party and having ignored it a decade ago when its price fell well below $300, might feel their gold is a long term hold, but in the markets with which I have had experience over the years (Asia and the gold souks of the Gulf), I have seen it used more the way a US consumer might use a savings or checking account. The owners do not hold it sacred, but simply use it as needed to move from cash to metal or metal back to paper cash. There's a prominent family in Saudi Arabia (al Rajhi) who joined the ranks of the world's billionaires by being the conduit for both currency and gold exchange for visiting Moslem pilgrims, spendthrift princes, and average Saudi Arabian housewives. The al Rajhi's were just a minor player in the Hunt Brothers bull market (looking for a trade rather than salvation), and did not take the hit (since recovered) by the likes of Mohammed Aboud al Amoudi, Abdullah al Suleiman, Khalid bin Mahfooz, Kamal Adham and Ghaith Pharoan. To the al Rajhi's, gold is just another thing to trade.
Gold would have never dropped below $400 without manipulation and Gordon Brown so $250 cannot be trusted as a true market bottom.
1999 USD are very different than 2009 USD. Using simple supply and demand, a worst case scenario for gold would be more than double your $250 figure.
I demand to hear more of these stories! The avatar is apt, you sound like a damn modern day adventurer! Love the insight.
Guys like me are into gold as an inflation and currency crisis hedge, we don't want gold to $5000, many of us would be quite happy with a strong dollar. I have always been thrifty and a saver so saving money in PMs seemed a better call then fiat paper. Granted as long as I'm working I won't sell unless I have to, much like I hate tapping into my savings.
seems like december was big with your WISDOM.
thanks, crazy, having these archives, right?
ZH how else can i send in some funds?
don't do paypal.
TAE has a POB, you should too. honest you promote sensible and sustainable living, take it back to a check writing time.
OMG I hate Paypal. Definitely not my "pal".
That's mostly paper gold. The Mint has stopped selling coins(they have pulled this stunt for the last 2 years)even though they are required to sell coins by law to the citizenry.
Gold is too expensive to sell in physical form for 1200 bucks an ounce. But it sells great like that in paper! There is 80x paper comex TP than real gold. The Treasury poops a little gold out every year and it gets snapped up.
Go out on eBay or a con shop and try to buy a coin for 1200 bucks. If gold corrects, look for even a bigger delta between the physical and comex priced gold.
when are we going to get a real physical spot price, instead of lumping paper and real together? That would be a lot more informative. (I know, I know, that's why they don't want to do it.)
The price of physically processing gold from ore to the ounce is about $1200 currently. So, the mint stopping coining the gold coins, when it actually is profitable is puzzling.
Where did that number come from?????? I've seen different numbers but nothing that high!!
my chance to buy, waited for a drop. Thx US and your crappy statistics;-)
"mop up the excess liquidity"
I hate that fuckin term. It's like trying to save the Titanic with a thimble...
its like stopping a giant falling rock with a paper-spoon...
paper covers rock, Fed scissors cut paper, rock crushes scissors, paper covers rock, Fed scissors cut paper, rock crushes Fed scissors, paper covers rock...around and around we go, everybody wins sometimes
All of the theories and anecdotal evidence presented here and other place to explain the (relative) value of gold is fascinating stuff. As someone with a slightly above average understanding of how markets operate, it seems there might be some technical value in understanding, from a historical perspective, how gold has been viewed as a commodity and traded through the ages.
For instance, in ancient Greece, gold was no more or less valuable than any other commodity. Gold's relative value was the exact same as common textiles, food, pottery, precious stones, etc. Back then, people regularly traded gold for basic necessities. They didnt hoard gold. If they had it, it was the first thing they spent. In ancient Greece, the only real value gold held was that it was convenient way for travelers to pay for goods and services, just like today;s paper currency.
That's just one example and obviously a very elementary review of history, and I am not trying to suggest that the psychology behind gold back then is necessarily relevant today. But one thing I have always struggled with is how or perhaps more importantly why in modern times gold has taken on an almost mythical status as a bellweather commodity. I wonder, at what exact point in history did gold become a precious metal and who were the people that bestowed such a high value on such a basic (albeit shiny) mineral?
The psychology behind gold, its intrinsic value, which, imo, is based on perception and little else, this is the one thing that has always made the gold trade seem too much like a gamble. Ancient Greece, in the greater scheme of things, isn't all that long ago. In a fragile economy where clearly anything is possible, it is my opinion that the illusionary value of gold could be shattered in the blink of an eye.
Nobody likes a good chart more than me, all the colors and zigs and zags and abstract correlations. When I was younger, it was all so mesmerizing. Now, its hard not to view their results as fanciful (and sometimes even valiant) attempts at rationalizing the irrational. It seems to me, if a trader/investor/speculator whatever wanted to make real money in the gold markets, they would spend less time pouring over charts and more time researching psychology to discover the REAL value of the gold.
This article above along with the quotes from UBS marketing tells me all I need to know: it's a freakin' bubble. Not sure where the top is, but when people start expecting 40% returns and growth is based on "an increase in the number of people who expect inflation to rise" it's time to run for the hills. These peddlers were saying the same thing in 2005 about real estate. The latter, according to many an analyu, is also a "store of value", inflation hedge, dollar hedge, etc., etc., etc.
Here is one way...http://bullion.nwtmint.com/mybulliontracker.php
+555 Great article. GOLD IS JUST ANOTHER ASSET... nothing else and nothing more. I wonder why gold investors are mostly paranoid? or its Citi, Leh and Bear investors paranoid, and gold bugs are normal?
Gold is a currency - the strongest one around - not an "asset".
because trust has been destroyed
I don't know enough to say whether it's 'just' an asset, but I do believe that physical gold has existed and will exist a lot longer than any stock certificate or fiat money note.
Here is a simpler version:
Because it was time.
Jeez - if you couldn't figure out Gold had a correction coming just by looking at the chart you're an idiot. Wait till Gold drops close to it's 50 DMA. We'll then start hearing (with Prechterites at the forefront) all about how the gold "bubble" has popped, deflation is back (which, apparently, has been shouted from the rooftops each and everytime Gold and other commodities have corrected during the bull run this year), $600 Gold, the dollar is going to rise and kill everything else, etc. etc. Of course, then will be the time to buy it again.
Im so glad I kept some dry powder, and waited. and now I will get my just rewards. the value of gold is stable, its everything else thats in limbo. I'm hearin burl ives singin SILVER AND GOLD, its my favorite christmas song.
Burl Ives FTW!
Have a holly jolly pullback
The coins are getting dear
Oh good golly it's a temporary pullback
I used to worry that gold might drop by a large amount, say 70%. Then I realized two things:
1. gold doesn't drop, the price of fiat currency goes up and down.
2. I still have the same amount in ounces I had before.
Then I started pricing things in gold instead of dollars and things seemed much more stable. If the price went to $100 I would just buy more. I only hold physical, and I never sell, so a lower gold price just means I can buy more.
I don't see gold as money, but as the perfect wealth storage. No fees, no risk of default, no counterparties. Gold is pure equity.
And if purchased correctly, no records of the fact that you ever purchased it. Therefore it is invisible to the ferral gummint.
Amen to that!!
isn't this job market "stabilization" just what we call "holiday help"?
There was the perfect confluence of events to convince everyone that gold was going to the moon and once the level got to about $1,200, too many people piled in to the futures, using too much leverage and the institutional buyers were pausing for breathe. Therefore, as the usual pre-Treasury deflation/ flight to safety effect kicked in, prices wobbled and the bullion banks did their usual dropping of the bid routine, safe in the knowledge the big players weren't going to hit them on the offer. Then as stop-losses got hit (which were far too tight owing to excess leverage and risk tolerance of the individual investors) prices kept falling.
Is it the end of the world for gold - yes, it is collapsing, nothing is going to stop if falling to $700, except for the fact that in a few days the Treasury auctions will be completed and everyone will decide the Dollar is toast again, when it will start heading back up...and it will be going back to the moon again.
I guess the fall should be an opportunity for those who missed the bus.
No idea why gold is down today aside from gravity but I do know the futures are looking red after 4am. So we all know what that means..time to wake up Hank Paulson and here is how they do it when we have red markets.
Ha ha. I've seen this before. I emailed my clients.
Also, I am not sure that Americans are "neophytes" about gold. Columbus came here for gold 517 years ago, and we are still here.
Americans are complete idiots when it comes to investments. People spend more time worrying about what to order at McDonald's than they do about what they are investing in. Gold is the ultimate scam, and the only thing missing from my calling a top in Gold is shiny bars on the cover of Newsweek.
Arming Goldman With Pistols Against Public
(Bloomberg) -- “I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker
see the Bloomberg video
Schroeder talks with Betty Liu about reports that senior bankers at Goldman Sachs Group Inc. are applying for pistol permits. Schroeder also discusses filing a Freedom of Information Act request with New York Police Department to confirm the information, the security fence that Goldman Chief Executive Officer Lloyd Blankfein erected at his home and steps the banks could take to quell public anger at Goldman's bonuses.
Gold will not drop below the levels China and India paid for it, they will simply step in and buy more with those massive reserves they are holding. Those prices are the dips, no need for technical analysis I Think at this point..
..unless the dollar rallies and they benefit more holding the reserves in dollars of course. who believes that will happen anyway??
John B presents a well reasoned paper, but I find it curious that he takes the jobs report at face value. Those that have taken a Perot "look under the hood" see the seasonal and exhaustion numbers indicating that there is little cheer to be had. Traders and risk managers will do what they must, but fundamentals will eventually assert themselves, as they also must.
I do not take the BLS numbers at face value, it was just outside the scope and point of that newsletter. Those BLS numbers, as many know, are un-credible, but the trend in the NFP numbers have been pointing in a better direction since Jan 09.
I would also caution your cognitive biases regarding fundamentals asserting themselves. Financial market behavior is largely an exercise of divorce from fundamentals. We all have biases, but these biases are largely statements of belief, and to that extent are less factual.
Tyler and Marla,
Bob Chapman is saying he knows that over half the 400 tons of gold sold by the UK at 'Browns Bottom' of $250/oz in 1999/2000/2001 went to the Rothchild family.
I'm trying to find corroboration of that now.
Bullionvault.com is now starting to sell silver too!
If they raise rates and it is reflected in the bond market, the US defaults.
Look at our balance sheet. We ARE BK.
It is either default or devalue.
Anyone know why SGOL is down ~10% premarket?
Funny thing is communist regimes and Central Banks hate gold with the same passion. Pure coincidende?
Didn't the bald moron say rates will remain low at least until '12? Time to get some gold eagles and buffalos (if you're lucky to find any!) Boys and girls
The reason the dollar is rising and gold is dropping is that Bernanke wants to be confirmed for a second term.
Bernanke can't save the U.S. Dollar. It's simply not possible. If he hikes rates, the dollar will collapse. If he tries to do reverse repos, it won't work. He can't sop up all that liquidity.
At this point, the damage to the dollar and the entire economy is too big to fix. The sooner systemic failure is allowed to occur, the sooner the excesses will be cleaned out of the economy.
Propping only prolongs the pain and diverts resources from healthy businesses.
here is the answer: this is what happens in a momentum trade.
i got out of my long when it couldn't bounce after that awful gap down. i was on alert because of the poor action on large volume the previous day.
For all of you gold naysayers: try buying an ounce of physical gold anywhere near the current spot price. Gold dealer prices usually move with the spot price plus a $25-50 premium. However, dealer prices have not moved from the high as the spot price fell. I've only seen this once before, and what followed was not good. Watch for some potential interesting economic developments in the next few weeks. Good luck and be safe ;)
People who deal in gold have to cover their positions just like everyone else does. Most dealers do not have a lot of stock on hand right now, which means most of them bought high. They are not going to sell at a loss when a price dip comes.
U.S. 1 oz Eagle $1,226
18:15 GMT 7/12/09
Short term traders buy gold on momentum, and sell on a break on it.
Long term investors who understand how too many dollars are being created to give to mortage and derivative charlatans will buy this dip.
Since gold is not in a bubble (you can't print it) we long term investors will use gold as our hedge to all this debasements to every currency, especially the US dollar (which is in a supply bubble).
What about going after the Fed with RICO?
Of course the powers that be would fight it with everything they have. But once the liquidity is removed (I expect this spring to keep/force rates down down as the Fed rolls debt, and tries to lengthen the average maturity time) and equities collapse, due to domestic $ deflation -- then the sheeple may finally understand how badly used and abused we have all been.
The politics will change and MAYBE we could get a RICO going against the Fed (and send BB to JAIL)
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