Some speculation on yesterday’s sell-off in the gold market


We could not let the latest downside break in the gold price pass without a word or two.  My first instinct is to point to the volumes on the COMEX yesterday and ask what on earth might have generated such an interest in gold on the short side?  At precisely 9am yesterday, 5,458,000 ounces of gold were presented for sale on the exchange – a paper trade of over 170 metric tonnes.  It was followed by another sale within the hour of another nearly 5,500,000 ounces, or another 170 metric tonnes, all toll 340 tonnes of paper gold dumped on a market that lacks a champion sufficient enough to oppose it – at least on the COMEX.

Are we to believe that thousands of commodity speculators the world over suddenly woke up Tuesday morning and decided to sell hundreds of tonnes of the metal on the basis of upcoming Congressional testimony on the part of the Fed chairman?  And how could it have occurred before even knowing the nature of that testimony?

It is unlikely yesterday’s sell-off in gold occurred because thousands of investors suddenly lost faith in the safe haven qualities of the metal, as some in the press are wont to claim.  More likely, it came the result of a small group, or perhaps even a single entity, deciding to short the market for its own purposes.

Of course, to the speculator in gold hoping to garner a profit, pointing out the nature of the problem is a poor salve for the wound inflicted.  Know, though, that the short position taken today must be reconciled with a purchase farther down the road lest the profits be left on the table.  That is why gold typically bounces back from these waterfall drops – though usually over a much more extended period of time than the original application of the short.  For the paper speculator, the wound might have been debilitating if not fatal.  For the well-capitalized investor, though, who holds the metal as a long-term safe haven in physical form, the wound – if a wound at all – is at worst superficial.

As is always the case in financial markets, for every action there is an equal and opposite reaction.  The reaction in this case will come in the form of stronger demand for the physical metal from buyers – including nation states, major financial institutions and individual investors – who understand the real nature of what just transpired and how to take advantage of it. It is interesting to note as posted here yesterday (and just below) that 17% of fund managers polled by Bank of America Merrill Lynch see gold as a bargain at these prices – a record number.

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