This is Not Your Grandfather’s Gold Market!

June 26, 2013 Updated: April 24, 2016

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*This blog was first posted at www.greenbergcapital.com on April 14, 2013*

 

For years, we have seen advertisements on TV and in the newspapers telling us to buy gold. We’ve been told that it is a safe investment. And for the most part, they’ve been right. For the past 12 years, depending on how deep your pockets are, gold has been a good buy. However, we saw on April 12th that gold, at any given moment, can turn and drop fast and hard – just like in all markets.

From the 1970’s up to until about 2000, futures in gold were traded in London on the LME and COMEX. These markets were physically settled and deliverable contracts, a true supply and demand contract. When gold started trading electronically it made it exceptionally easy for any one or any fund in the world to buy, hold or sell gold. Then came the GLD, the gold EFT.

The GLD changed the gold market forever. It made it so the average investor could own gold in their portfolio without going directly into the futures market.  The supply and demand on the physical side was changed, and we started seeing gold rise more steadily and quickly than it had in the past 30 years.

During my lectures and coaching sessions, I ask students to visualize a market, such as gold, as a bucket that is being pulled to the top using a pulley. We have all heard CNBC, Bloomberg and other networks use the term “melt up.” Think of pulling the rope to get the bucket of gold coins up to the top.

Now, think of a sell-off, such as the one we just saw in gold.  The grip on the market loosens and the market starts the sell-off.  It’s like letting the rope go and the bucket falling fast and hard. In your grandfather’s gold market, there would be a point where the COMEX 100 oz gold contract would find equilibrium. But in the electronic and EFT markets of today, the speed and depth of the down move is super-charged by the amount of people who now invest in GLD. Many of these people are average traders who will not have pockets deep enough and be forced out once again, adding to the sell-off.

During the sell-off on Friday, one of the financial news network anchors said, “When will this end?” 

I have commented in past blog posts that his famous line and others, such as, “It has to bounce” or “This market has to recover” are fables. It does not. This sell-off in gold may be far from over.

There are still many people who are getting onto positions that, if the slide continues, will force them to liquidate due to margin calls.  There are people who bought it  at $100 or $200 higher, after hearing all last year that gold was going to $2500.  I would be very careful trying to pick a bottom in this market.  It is a small market and due to electronic trading many average investors, who should have never been in this market, are starting to feel the pain on a position that has now turned against them.  Some will hit the panic button, and there is just not enough product for everyone to get out without a major sell off.

When I traded gold in the COMEX pits, it sat between $500-$600 for years.  This market has a lot of downside risk and now, on every rally, there will be natural sellers from traders and average investors who are caught at much higher levels.  Most were caught off guard.  Not everyone has the information pipeline that the big trading houses have. For example, Goldman looks like the hero again. Earlier this week, Goldman said they could see gold selling off.  Then, on Friday, news come out from Cyprus that they are in the process of selling gold. Coincidence? Maybe, maybe not.

More trading tips and rules are offered through my business coaching as well as lectures and speaking engagements.
 
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