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Who-oh-who is to blame for the gold
price moving against you, up
or down...?
SO EUROPE
might be facing deflation, and Greece might begin a firesale
straight after this weekend's vote. Yet still €1.1 trillion doesn't buy
what it used to.
Last winter, the European Central Bank soaked the currency union's commercial
lenders with cheap loans, lending them cash to lend
in turn to their domestic governments by buying government bonds. But now
Spain's 10-year bond yields are at a fresh Euro-era high of
6.73%. Italy's borrowing costs are back where they were before
the second chunk of El Tro was
unleashed in February.
The cheapest 3-year money in history – lent for just 1% per year
– has proven itself worthless in short. Any wonder people keep opting
to buy gold for protection?
The recent swoons and jumps in the gold price, however, have the market
scratching its head. Both of this week's pops came just as New York got to
its desk, but with barely a ripple in the gold futures market – where
US traders typically throw their weight around. So it seems most likely to be
simply a heavy gold buyer, bidding up prices for a chunk of physical metal in
the wholesale market.
Whoever it is, they're spoilt for reasons to buy gold – Greek elections
on Sunday, record-high Spanish bond yields, or a weakening US recovery. Take
your pick. Massive money inflation, either before, during or after a major
credit default, isn't a risk you can discount to zero or nearby today.
Yet still the finance business demands cause and effect. The obsession with
tick-by-tick reasoning – the relentless search for "This because
that" – goes far beyond financial journalists. The classic
example, cited in Daniel Kahneman's recent Thinking: Fast & Slow
by way of Nassim Taleb citing
it in The Black Swan,
was when a Bloomberg headline writer first
blamed the capture of Saddam Hussein for a rise in US
Treasury bond prices, and then, minutes later, rewrote the headline to blame
the very same event for T-bonds falling when the price dropped.
"The
two headlines look superficially like explanations of what happened in the
market," says Kahneman. "But a statement
that can explain two contradictory outcomes explains nothing at all."
And
so in gold, some market participants saw this Tuesday's $30 jump, says one
bullion-bank salesman, coming from Fitch's downgrade of Spanish banks. Others
players we spoke to saw Wednesday's rise – which then reversed –
coming off the weak US retail sales data. Yet more traders saw both moves as
just noise spat out by automated traders, those algorithms run wild on
electronic platforms which mean even market-makers can't see quite what is
happening with physical flows.
"The
Electronic Platforms, or 'machines' or 'toys'," says one, "already
installed at clients' desks and currently marketed by commercial banks for
precious metals trading [mean] that market-makers are lacking a bit of view
of what is happening on the spot [market in gold] from time to time."
Moving
a little flow away from the biggest banks might sound a "good
thing" to some. But blaming the electronic machines and toys for
nonsense moves in the gold price is becoming a popular pastime in the
professional market, especially for traders caught the wrong side of what
feels like volatility.
Truth is, however, the violence of gold price swings has been easing since
last summer's 3-year highs. And if London's market-making bullion banks feel
they can't hang a story on what's driving the price tick-by-tick, few
journalists or private investors will spot the "true" cause either.
So save your energy. Because what matters, as with any home for your savings,
isn't whatever breaking headline might or might not be driving other people
(or machines) to buy, only to sell – and buy again – before the
next newswire update. It's the core reasons you do or don't identify for your
own decision to buy or sell.
With gold investing, we'd suggest, those reasons to consider start and end
with the threat to your own savings from the ugly twins of default and
devaluation. Still lurking round the corner, what odds would you put on them
mugging your money in the next month, year or half-decade? Five years and
$900 per ounce after the start of the financial crisis, it still looks a long
way from finished yet. And hoping that you won't need uninflatable,
indestructible gold isn't the same as not needing it.
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