Markets Driven by Greed

September 18, 2008 | By | Reply More

Yesterday at last saw the re-emergence of confidence in both gold and silver in their role as stores of value in the face of the turmoil taking place in worldwide financial markets. 

You may very well ask why this has taken so long. Previous posts on this site have expounded various theories, some reasonable and some fanciful, but at the end of the day no action that can affect the markets has become too far fetched to be discounted.

Despite this we have faith that the proven principles that have driven markets and financing throughout history will once again dictate their behavior.

The era of the short term approach to produce ever better results driven by greed together with pressure from institutional shareholders has now probably drawn to a close as all parties withdraw to lick their wounds and think up excuses to justify their gross errors.

In the meantime liquidity problems still dominate the actions of over confident hedge, investment mutual and institutional fund managers, not to mention the many small investors, all of whom are finding the pressures mounting to meet their obligations.

As evidence, just think of the sell off of stocks that has occurred on Wall Street in the last two days when some of the best managed and profitable companies have suffered in step with the dross.

The hard fact is that money is very, very tight!


That simple fact alone will have considerable bearing on the price behavior of both gold and silver. For the market to continue to trend upwards, as the fundamental outlook has been forecasting for weeks, long-term investment dollars will have to keep becoming available. We have to look further into the mechanics of the market for these two metals.

To start with it must be appreciated that the gold market sector is small compared to almost any other sector, with the silver market even smaller. In comparison with other markets much smaller sums of money will drive the price of the two metals either way and at times very quickly. Just look at yesterday’s price action!

The rise in interest in gold and silver ETFs also introduces new action into the markets simply because they hold physical metal to the value of the fund at any given time. As investors buy or sell the ETF so the ETF buys or sells the physical metal.

As the ETFs trade in the same way as stocks and shares, tick-by-tick in the same market place, they also become a vehicle for short-term speculators, IShares gold ETF (GLD) has recently become tradable on the option market.

For most small investors ETFs are a convenient alternative to trading physical gold, although Bullion Vault may argue this. Some of the drop in spot gold could be attributable to IShares investors unwinding their positions resulting in the physical metal coming back into the market place.

As traders become more aware of the supposed attractions of a market that responds as quickly to lower money flows, has no competitors within its sector, no management performance to analyze, no quarterly or annual profits to forecast, no P/Es. dividend yields, etc., etc., to consider, then increased interest and volatility can be expected.

If regulators restrict or, in the case of financials, altogether ban short selling as some commentators suggest, then the option market will get a huge boost as the only practical vehicle for speculators to profit from under- performing stocks.

Gold and silver are a different kettle of fish, there is a global bullion market out there that is not under the control of governments and where two way trading in spot and futures will continue without interference. That could turn out to be another hook to draw in more traders and short-term specialists.

There is also a vast difference in global attitudes to the two metals that is difficult for westerners to appreciate. In particular Indians revere gold as visual evidence of wealth and success.

This vast country and population has for centuries suffered in poverty for the many and opulent displays of wealth by the few. Those displays of wealth primarily took the form of gold and jewels.

Is it then a surprise that as prosperity advances to encompass the many, they should set their goals on acquiring a store of the yellow metal, usually started by the giving of wedding gift, an opportunity for the givers to show their friends and neighbors, and maybe their business competitors, how successful they have become.

Not forgetting that most marriages are still arranged, so a partner from an obviously affluent family is desirable. It is estimated that out of a population circa one billion there are already 250 million that have reached middle class status and that is growing.

People throughout Asia, China and the Middle East still consider that gold is the only true wealth indicator and both governments and individuals remain acquirers whenever market circumstances are favorable.

Both metals were out of favor with western investors for twenty years until the dawning realization that western stock markets and the dollar were storing up big trouble. At the same time China, India et al were, and still are, rapidly growing more affluent.

With their attitude to gold and their vast populations can there really be any other logical out come for the price of the yellow metal and its junior lockstep partner than onward and upwards.

However the government or central banks attempt to manipulate and cause distress to the gold and silver market to prop the dollar the eventual outcome is not in doubt. In the meantime we must wait for the liquidity problem to work its way out of the system and put up with the speculators short-term flurries into the market.   


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