Gold and the Fear Trade

May 22, 2013 | By | Reply More

Fear is the driver of gold and silver. Since last October when gold hit $1800 an oz. that fear has dissipated as investors have recognised that good old stocks and shares have moved into bull territory thanks to the money printing policies of the US and other governments.

At this same time that fear of an inflationary spiral has taken a back seat to greed, resulting in money fleeing from the precious metal and mining sector into stocks.

Expect Massive Loss of Purchasing Power

Just to be clear and at the risk of repeating ourselves there can be no doubt that the fundamentals that have driven gold into a ten year bull run remain in place and if anything have been strengthened.

The thought that any end result of these ongoing QE programs other than a massive dose of currency devaluation and loss of purchasing power and savings is to throw centuries of economic experience out of the window. All we are doing is delaying the fateful day of reckoning.

Any thought that any government can put in place a program that will effectively reduce the amount of the excessive currency, electronically or otherwise, is a pipe dream. Sooner or later we, or our children, will be paying a bitter price for the procrastinations of politicians and bankers alike.

Just this week there have been signs that gold has bottomed and that the fear trade driving  precious metals is returning. Here are a few clues that lead us to this opinion.

  • Despite silver falling 9% resulting in the CME halting trading four times in ten minutes due to an overwhelming amount of sell orders the metal quickly shook off the drop and drove to near $1400 before settling at the time of writing around $1385 in Europe.
  •  When gold made a double bottom in the circa $1320-1340 levels volume was much reduced. We think that many bears were were caught short and some may have suffered severe losses.
  • The cause of gold and silver nose diving on Monday was likely caused by highly leveraged paper traders, basically weak hands in this market, bailing out along with triggering machine trades created by the algorithms of funds, banks and other high profile market participants (complex computer formulas made up of technical and fundamental information that automatically instantaneously triggers trades and said to account for 30% possibly a great deal more, of daily US stock market trading).
  • Physical gold has remained a strong market with plenty of buyers worldwide active in the market. Known as strong hands because they are taking possession of their metal and not trading leveraged paper.
  • In the event that either Comex or the London Metal Exchange are expected to deliver even a fraction of the amount paper traded on their floors, it is likely that they simply do not have access to enough physical metal, gold or silver, to meet the commitment written into their constitution. If that occurred then expect prices to zoom up overnight.

Dollar Strength Slows Down Gold

In the meantime it should not be overlooked that the dollar remains strong, although against a basket of the currencies of the developed nations where money creation has been rife.

A strong dollar has a negative effect on the price of gold and at the present time, with the Dow and S & P 500 hitting highs and many investors continuing to believe that they can make good returns on other sectors of the market, and they may be absolutely right, then gold may dither for some time.

Right now gold and silver’s price action leads us to believe that strong support around the $1350 level is in place and that the fear trade is slowly returning.

Related Posts Plugin for WordPress, Blogger...
More on this topic (What's this?)
Man Standing Next to All the Gold on Earth!
Gold Standard Coming Back
Fake Gold in Manhattan
Read more on Gold at Wikinvest

Tags:

Category: Gold

Leave a Reply

BullionVault