2011-09-27 19:37
With gold closing last week down almost 10% and silver approximately 26%, the metals have certainly lost their shine, once again pitted to ridicule. This correction has been sharp and horrific for new investors, leaving questions as to what happened and how gold and silver could drop so far given the problems of the world today. But the most important question is, has gold lost it’s “Safe Haven” status?
This is a topic I covered on my last post so have a duty to investigate what has happened. Was this a kneejerk reaction or was this a fundamental flaw in the properties of gold and silver and what does this mean to those who still hold the metals at ransom to higher prices.
One thing for sure, is there are now difficult resistance levels set on the upside for any future price appreciation, but what about the price action just passed? Last Thursday the financial world stood still for a moment to analyse what Operation Twist would mean for them. Aside from using new popular memes such as “significant downside risk”, Ben Bernanke announced the selling of short term securities, whilst buying longer maturities between 6 and 30 years.
In addition to this, the particular operation has been extended till June 2012, subtly hinting it would be unlikely for added stimulus in the near term and certainly not likely at the next FOMC meeting in November. This has seen the market which was once fuelled by hope and rumour react rather unappreciatively to the cold shoulder. Read into this subtle hint as you may, but it is important to remember that central banks can only effectively operate with surprise to feasibly turnabout the market.
So as the dollar rallied and liquidity proved vital, investors turned to their only holdings that proved profitable this year. This is an important investor mindset factor to take note of, as gold did not behave like money, but I don’t believe that will last. Slowly more and more states in America are allowing gold and silver as legal tender, whilst countries still choose to accumulate the physical metal due to it’s barbarous properties. Only the legal monetary factor stands in the way, as the world slowly catches up to this fact and so in turn changes the important psyche of the investor towards gold and silver. There will soon be a day when monetary metals live up to their name and do behave very much like other currencies and it will be a stark reminder that it is the hardest currency in this small global town.
So I will not deny that liquidity was one of the major factors for this sell off and also silver had the additional factor of being an industrial metal. But where would the price be without the margin hikes? The day after Bernanke’s announcement, the CME raised margin requirements by 21% in gold, 16% in silver and 18% for copper. The choice in requirements was later followed by the Shanghai Gold Exchange raising requirements for silver contracts by 20% in the early hours of Monday morning, coincidently it was key timing for smashing through important support levels, tarnishing the psychology of the investor mind.
I will let you decide the valid reason for the margin calls, but I would only point out that the 2 margin hikes certainly did not seem to correlate with an upward move in price. This is important as it indicates that perhaps banks were anticipating gold to increase on post liquidation sell offs. If it were not the case, then the margin hikes would otherwise be uncalled for. So the important question; has gold lost it’s “safe haven” status and the answer being an astounding yes, but only in an interventionist market.
With the changing legality of the metal’s monetary status and psychology shifting, future intervention and the restraints of fiscal policy will only operate less effectively and eventually will not be able to operate at all as distrust occurs. Perhaps this is why the LBMA indicated forward rates close to backwardation over the weekend, which has somewhat now subsided. This is why it is important to hold metals in the physical form.
So for those who saw the fundamentals as still strong but incurred pain over the weekend, it is important to be reminded of why you chose to buy physical. Unlike traders on ETFs who look to make profit on margins, the people who take delivery of the physical are accumulating as they understand the game. They aren’t looking to sell on the short term, as obviously it becomes a slower transaction to deal with the physical form. Instead they know prices have to go higher because of the Euro crisis and the US debt crisis. They spend their monthly earnings to buy and own physical, not to trade. For the short term we can only state the fundamentals, but never estimate when a margin call is due.
http://www.scribd.com/doc/66096748/Gold-Margin-Hike-9-23
Richard Valentine