The Margin Clerks Were Working
Via Mark J. Grant, author of Out of the Box,
"This is the excellent foppery of the world: that when we are sick in fortune -- often the surfeits of our own behavior -- we make guilty of our disasters the sun, the moon, and stars, as if we were villains on necessity, fools by heavenly compulsion, knaves, thieves, and treachers by spherical predominance, drunkards, liars, and adulterers by an enforced obedience of planetary influence. An admirable evasion of whoremaster man, to lay his goatish disposition on the charge of a star!"
You will hear many people in the next few days telling you that the gold market decline was just a correction. I do not share this view. For one the drop in the price of gold was the largest two day drop in 30 years. Secondly the volume was a record. This then leads to other conclusions.
Long experience in the markets will inform you that this kind of massive sell-off is indicative of someone or perhaps a numbers of someones with serious problems. It may be ETF's, it may be some hedge fund or it may be central banks who have pledged their gold as collateral with the ECB but somebody is in trouble. You do not get the breadth and depth of this kind of drop without someone having very serious issues.
"Thought, like all potent weapons, is exceedingly dangerous if mishandled. Clear thinking is therefore desirable not only in order to develop the full potentialities of the mind, but also to avoid disaster."
-Giles St. Aubyn
You can chalk some of it up to the apparent terrorist acts in Boston perhaps but the implosion was underway long before that took place and, in any event, a threat to the country generally results in gold spiking higher and not the opposite effect. Another indicator here is the sell-off in equities. In my opinion this was not just a correction either but the fallout from gold. The massive margin calls in gold forced people to sell equities to gain additional cash and you got a spiral effect in both markets. Then as stocks dropped there were margin call in equities so that one decline fed upon the other. The losses were of such magnitude that both markets entered what can be honestly called a feeding frenzy and the carnage was self-evident!
Given the severity of the decline you are likely to see a bounce in both gold and equities today. I would cast a suspicious eye upon both. The drop-off was of such magnitude that it may be little more than a short covering rally tinged by the believers that both markets will go up eternally. It will be a few days but it will leak out just who was singed by the decline and for how much and then we will have a better perspective.
The world is a fragile place these days. World-wide Quantitative Easing has buoyed all of the markets. The backdrop though is economies that cannot support current prices. Europe and Japan are both in tatters, China is slowing down and America is in what I would call a "sputter." Yesterday was a stark reminder of what can happen when the discrepancy between the results of the flood of newly minted cash comes into conflict with underlying fundamentals. The markets can turn on a dime and the move can be severe and painful.
Yesterday the margin clerks were hard at work. Today they may be more restful but those clad in the green eye shades may not be done with us yet. Yesterday also gave us an important hint.
The cash provided by the Central Banks has been leveraged to the nines as indicated by the severity of the sell-off in both gold and equities. More cash will likely have to be raised in the coming days which is why I think the Fates may not be done with us yet. Early morning indications do not indicate a bounce of any magnitude, in either market, and so I would remain cautious as many over-leveraged positions continue to scamper for cover.