How a very big gold drop could occur quickly
derryb
Posts: 36,793 ✭✭✭✭✭
this guy explains the power of the ETF GLD in the gold market. Based on the points he makes about GLD, it is reasonable to expect a very big drop in spot when the holders of GLD bail out. I belive there are no good reasons for this to occur any time soon other than the fact that emotions play a very large part in all markets. A run on GLD, for whatever reason, will not stop until the fund dumps a whole lot gold into the marketplace to cover the exodus. My prediction is that when the slaughter occurs it will be the result a run on GLD.
Per the author: "The removal of the largest buyer and the introduction of more supply to the market may cause a decline in the price of gold.
The market force of GLD
Per the author: "The removal of the largest buyer and the introduction of more supply to the market may cause a decline in the price of gold.
The market force of GLD
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
0
Comments
(x2,Meltdown),cajun,Swampboy,SeaEagleCoins,InYHWHWeTrust, bstat1020,Spooly,timrutnat,oilstates200, vpr, guitarwes,
mariner67, and Mikes coins
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
Author: If you think there is a chance that it drops below $1250 in the next 12 months.....I think the trade is a no brainer.
I don't think it's a no brainer by any means. Wasn't gold not making a 9th or 10th consecutive end of year increase a "no-brainer?"
Most of what the author is calling facts are merely assumptions on his part. Why is the 1300+ tons of gold in GLD any more market ready than the 125,000 tons of gold held outside the central banks? In any downturn I would expect a portion of that 125,000 tons to come on to the market. On the flip side, what if some of the larger investors in GLD like Soros, Paulson, China, etc. decided they wanted to take delivery of their gold and exit the fund? That's what David Einhorn of the Greenlight Capital fund did when he cashed out his large stake. That gold never hit the market. It went right into a private vault. Imagine if GLD had to come up with 93 tons of gold on fairly short notice to cash out Paulson? What if every GLD investor with more than 100K shares decided to take physical delivery due to question about Comex or LBMA gold inventories? The real question is if there were a run on GLD who would have the larger effect, the guys with large positions that could go home with their physical or the little guy who will be cashing out in paper? Would we get a melt up or melt down?
If there were ever a run on GLD, the Chinese would love to purchase every ton available. Between me and you, if they could dump $58 BILL in dollars and TBonds at current gold prices, they'd buy every legit bar of gold in the fund in a heartbeat. For that matter so would the US since they could simply print the $58 BILL. That's about 1/2 of the upcoming month of TBond purchases the FED has just scheduled.
roadrunner
Fellas, leave the tight pants to the ladies. If I can count the coins in your pockets you better use them to call a tailor. Stay thirsty my friends......
<< <i>I can easily envision a limited down day in silver and /or gold. Matter of fact, I would count on it. MJ >>
My point is that GLD is the one thing that could make it go unlimited. An emotional snowball, if you will.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
It is interesting that the author is apparently a professional trader, as this is the type of thinking that typically gets casual investors into trouble with options. (even though these are not his words, what is really lurking behind this statement is the thought "surely it is a no brainer that gold will trade below $ 1250 in the next 12 months, so this is easy money")
If I were trying to support such a view (ie, 1250 gold), I would want to base it on an analysis of geo-polical and other factors, not possible sales from GLD.
Knowledge is the enemy of fear
If I were trying to support such a view (ie, 1250 gold), I would want to base it on an analysis of geo-polical and other factors, not possible sales from GLD.
I knew it would happen.
It's 10% from current levels but 13% from the recent peak. I think that's too much for an intermediate leg correction in gold. Note that the drop from $1226 was 15% from a much more overbought condition. We've not yet seen that kind of bullishness on this run up based on distance away from the 200 dma. The 33% correction in 2008 was a major 5 wave/7 yr blow off top. The current wave pullbacks should stay in the single digits similar to the wave 2 correction ($1262 to $1155) which was 7.5-8.5% depending on how you calculated the top. When gold finishes off this current intermediate move in 2011 a 15% pullback would make sense imo.
roadrunner
<< <i>I can easily envision a limited down day in silver and /or gold. Matter of fact, I would count on it. MJ >>
Fred, Las Vegas, NV
There are simply way too many buyers of the precious metal right now. The euro is trash, and if our economy is
improving, then why haven't tax cuts and stimulus/q.e. 1 & 2 helped ? The dollar is simply crumbling.
Certainly there is a very real possibility of a 10 % drop. But to try to hint that investing based on this assumption is a no-brainer is a mistake. There are many one year periods over the past ten years without such a drop.
<< <i>I will personally back up a u-haul if gold retraces to 1,310.
There are simply way too many buyers of the precious metal right now. The euro is trash, and if our economy is
improving, then why haven't tax cuts and stimulus/q.e. 1 & 2 helped ? The dollar is simply crumbling. >>
My very 5th grade view on gold:
1. All of the world's gold that has been mined would fit into two olympic-sized swimming pools (per National Geographic).
2. I see no plan coming anytime soon that will drastically reduce the US deficit.
3. The number of people that can afford gold is probably rising (China, etc.).
4. The amount of gold coming out of the ground will probably slowly decline, as it is a finite resource. Well, until we discover that Jupiter's 5th moon is made of 50% gold and 50% cheese.
5. Gold is a physical object that has always had value.
Considering that the major Western currencies are even trashier than in 2008 and China is a big buyer, a run *into* GLD is much more likely.
My Adolph A. Weinman signature
MOO
TD
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>$1250 would be a 10% drop from current levels. So whats the big deal
It's 10% from current levels but 13% from the recent peak. I think that's too much for an intermediate leg correction in gold. Note that the drop from $1226 was 15% from a much more overbought condition. We've not yet seen that kind of bullishness on this run up based on distance away from the 200 dma. The 33% correction in 2008 was a major 5 wave/7 yr blow off top. The current wave pullbacks should stay in the single digits similar to the wave 2 correction ($1262 to $1155) which was 7.5-8.5% depending on how you calculated the top. When gold finishes off this current intermediate move in 2011 a 15% pullback would make sense imo.
roadrunner >>
Why does gold only have to selloff from an overbought condition? And what is overbought? When it makes a parbolic move?
Knowledge is the enemy of fear
<< <i>
<< <i>$1250 would be a 10% drop from current levels. So whats the big deal
It's 10% from current levels but 13% from the recent peak. I think that's too much for an intermediate leg correction in gold. Note that the drop from $1226 was 15% from a much more overbought condition. We've not yet seen that kind of bullishness on this run up based on distance away from the 200 dma. The 33% correction in 2008 was a major 5 wave/7 yr blow off top. The current wave pullbacks should stay in the single digits similar to the wave 2 correction ($1262 to $1155) which was 7.5-8.5% depending on how you calculated the top. When gold finishes off this current intermediate move in 2011 a 15% pullback would make sense imo.
roadrunner >>
Why does gold only have to selloff from an overbought condition? And what is overbought? When it makes a parbolic move? >>
Since its only value is what someone is willing to pay for it, it cannot be currently deemed overbought. "Overbought" can only be argued after a selloff.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>Cohodk - regarding "$1250 would be a 10% drop from current levels. So whats the big deal?"
Certainly there is a very real possibility of a 10 % drop. But to try to hint that investing based on this assumption is a no-brainer is a mistake. There are many one year periods over the past ten years without such a drop. >>
I'll agree with that. On average it probably does sustain a 10% drop every year, sometimes more sometimes less. Some of these drops even occur when no one expects.
I do agree with the general premis of the article in the ETFs have greatly manipulated the prices of commodities as well as stocks. Look at copper for instance. Demand is less than 2 years ago and the dollar is strong. Both are headwinds against copper, yet it has defied gravity. Why? Because of the creation of new copper ETFs. The success of the price of gold as has a lot to do with ETFs, same for silver.
Gold really started it run higher in 2004-2005 with the creation of GLD. The dollar index closed yesterday at 80.07. In Dec 2004 it was 80.39. So gold hasnt gone higher because of a weak dollar. The dollar index is the same as 6 years ago. Gold has gone higher due to increased buying, and GLD has had a lot to do with that.
When the time comes for people to sell GLD, the price of gold WILL decline.
Knowledge is the enemy of fear
<< <i> The success of the price of gold as has a lot to do with ETFs, same for silver. Gold really started it run higher in 2004-2005 with the creation of GLD. The dollar index closed yesterday at 80.07. In Dec 2004 it was 80.39. So gold hasnt gone higher because of a weak dollar. The dollar index is the same as 6 years ago. Gold has gone higher due to increased buying, and GLD has had a lot to do with that. When the time comes for people to sell GLD, the price of gold WILL decline. >>
My point in a nutshell. GLD is a driving force in the marketplace and a GLD selloff, for whatever reason (non-fundamental, emotional speculators?), will have a major impact on the price of gold. A selloff in GLD will be quick and devastating to the gold price. A wise investor will see this as a selling opportunity followed by a buying spree.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
One can only look at the track record of gold peaks this past decade and make observations. Certainly this is a better method of determining what is overbought than just a gut feeling. The significant gold peaks of the past 4 yrs topped out at 25-33%>200 dma. That's as good as place as any to determine what overbought means during a lengthy gold rally. Whether parabolic or linear really doesn't make any difference imo. Until a better thumbrule comes along, +25% works, assuming that the momentum oscillators coincide with their definitions of "overbought" as well. But hitting +25% doesn't mean a corrrection will result either. The current level of +17% as the top of a breakout from a cup and handle would be a significant change. I'm not convinced. If it were the handle part, then yes, I would expect a >10% correction occuring right here.
I do agree with the general premise of the article in the ETFs have greatly manipulated the prices of commodities as well as stocks. Look at copper for instance. Demand is less than 2 years ago and the dollar is strong. Both are headwinds against copper, yet it has defied gravity. Why? Because of the creation of new copper ETFs. The success of the price of gold as has a lot to do with ETFs, same for silver.
You say the dollar is "strong." But it's only "strong" compared to a basket of declining currencies. If 7 people fell out of an airplance would you say the guy that is currently falling the slowest (USDX) is the least likely to hit the ground? Or maybe the last guy could cushion the impact by landing on some of the others? Compare the US dollar to copper or gold over the past 2 years....it's been one long decline. No strength whatsoever is visible yet. In comparing copper demand for the past 3 yrs it's fairly flat but higher than any part of the decade. It also seems to be >20% higher than what is being mined. If I use the USGS data that gap is even larger. Thank heavens for Chile which supplies about 30% of world production. What would happen w/o them? From date supplied by International Copper Study Group, 2009 production was an all time record year and 2.5% higher than the previous 2 yrs. Indonesia contributed the bulk of that gain. Maybe 2010 data shows this in a different light and Asia is slowing down their construction. copper stats
The untold part of the GLD story is all the money it has diverted from gold producers and explorers. I think this is one of the intentions of creating GLD. At least GLD would be under the control of the big banks, but the producers (other than Barrick) would not be. It's no secret that the unexciting performance of the gold miners from 2004-2010 can be partly attributed to money being diverted to GLD and other "physical" gold funds. The gold miners had their best years of the decade from 2000-2003....before GLD came about. Compared to gold they peaked out at the end of 2003 and have yet to close the gap. GLD and other ETF's are probably a big reason why. The $58 BILL residing in GLD would have bumped the market cap of all the miners up about 30%. So I see GLD as more a diversion than an outright boom to gold. Before there was a GLD many more peoplewould have invested in miners for diversification. If you're a banker and knew that gold was going to be rising throughout this decade by tens of billions of dollars in market share wouldn't you want to have a direct hand in the control of the that? Hence GLD and SLV. If people were free to only choose individual miners the control would be much more difficult. From an inventory standpoint, GLD weathered the 2008 fallout very well. The drop in inventory was rather modest compared to the carnage around it. But one can also say that the inventory of GLD has been rather stagnant for a couple years now. I think that's because more and more investors are starting to question the amount of physical metal held by these various ETF's. Before it was about the only game in town. Now there are other US and foreign competitors.
Gold really started its run higher in 2004-2005 with the creation of GLD. The dollar index closed yesterday at 80.07. In Dec 2004 it was 80.39. So gold hasnt gone higher because of a weak dollar. The dollar index is the same as 6 years ago. Gold has gone higher due to increased buying, and GLD has had a lot to do with that.
The dollar has never been a linear function vs. the price of gold. It's closer to a cube, at least over the past 8 yrs. And I suspect the reason is that the amount of fiat (printed and keystroked), credit, and debt far outweighs the total amount of PM's in the world. One would not expect a linear function. USDX is just a group of 6 declining fiat currencies being compared against a relatively rigid standard of gold whose inventory only increases about 1.5% per year. Gold can also be evaluated using "money" supplies, real interest rates, derivatives, and confidence in govts. Trying to get a handle in today's world on all the various contributing factors is near impossible. At least in the 1970's it was an achievable exercise as funny money and debt obligations were far less opaque. Just because the USDX is the same absolute number that it was 6 yrs ago doesn't meant that all currencies in that basket didn't decine by X%....and I'm sure they did or gold wouldn't have risen strongly against ALL of them in those 6 yrs.
When the time comes for people to sell GLD, the price of gold WILL decline.
Probably. But as CaptHenway pointed out, it's also possible that a run on the "bank of GLD" due to a lack of confidence in their management could result in rising physical gold prices, and declining GLD prices. Paulson, Soros & China will get their gold before the doors are closed. Others won't be so lucky. Why did David Einhorn's Greenlight Capital decide to move their Billions in gold out of GLD and into private vault storage? Why do no top executives of GLD own any shares of their company or at least won't publically say they do? One can also look upon GLD as just another Central Bank with 1300 tons of gold. The EU sold off 500 tons of gold per year for a while and while it temporarily pushed back prices, it's net effect was tossing more gasoline into the fire. A GLD sell-off would be no different.....weak hands giving up gold to stronger hands. The amount of gold effectively available really doesn't change considering mined production pales to world supplies. And gold mine production has been in decline since the start of the decade despite rising demand and quintupling of prices.
roadrunner
Just don't complain when you run to your local B&M and find out that gold eagles are now spot +$125, cash money.
TD
Is there any data that shows where the gold has moved to when previous sell offs have occured? Does it go straight to the LBMA warehouse? Are there Central Banks, other gold funds willing to absorb GLD inventory?
I started to read the prospectus of GLD (I've held a decreasing position since conception)... but fell asleep from boredom... was it not the intent of GLD to track the price of spot gold... does the margin (which has increased over the years) fluctuate as seen with say the NAV premium -- Central Fund of Canada?
If there was a sell off in GLD would we see a price discount to spot?
Could there not be a situation where the holdings of GLD stays stagnant while spot has 'significant' moves?
Personally I've been moving $$$ out of GLD and into physical... is that not a 'wash'. The longer I hold GLD the less I like it... I don't blame anyone wanting to move out of GLD and into something else -- gold related or not.
The premiums in GLD have been miniscule compared to GTU and CEF which at times have double digit premiums in effect. Some have said that's because you know you're getting backed gold for your money. The requirements to physically inventory and account for CEF and GTU are far more transparent than GLD. GLD has a daisy chain of custodians and sub-custodians who are only accountable on paper for their holdings. How else could you explain the huge difference in premiums? GLD almost always is selling within 1% of spot. GTU and CEF almost always cost at least a few percent or higher. GLD tracks gold amazingly well however they do it. And in all types of market conditions the premiums are tiny and fairly steady. GLD inventories have stayed steady at times during up moves and down moves. Though most of the time inventory tends to move with price.
If the financial world should start to teeter again, as a big bank would you be happier knowing you have GLD/SLV within your grasp or some underground ore yet to be mined?
I pulled this from a Kitco gold thread today on this very subject:
GLD is suspect because:
1) Audits are not quality. There were duplicate numbered bars in past published audits and they are not by an independent firm.
2) They hold a lot of paper gold versus bullion.
3) Where the actual Gold is held. HBSC/London.
4) The apparent use of GLD for 'loaning' out its gold for market manipulation.
5) In a possible connection with #4, GLD wasn't buying addition gold holdings as it had done in the past with the recent run in the POG. How this may have connected is that their purchases would have increased the POG in that market unacceptably and that is not what this fund was created for.
roadrunner