Gold prices have caved today under pressure from dollar appreciation and wave of technical selling at key chart points - selling aggravated by continued flow of funds from gold (and commodity indexes) to equities.
Just as the rising price trend in the equity indexes has attracting more buying, the renewed downward momentum in gold is engendering short sales and more outflows from gold ETFs.
Importantly, program trading and other technical strategies have added to the downward pressure on gold - and continue to do so. (See my previous commentary posted earlier today for more on program trading and the dark pools.)
Institutional selling of the commodity indexes (some of which include gold) and by commodity funds is also contributing to gold-price weakness.
But pricing across asset markets continues to be inconsistent and illogical. Rising equity prices are usually an indicator of economic vigor, right? And, falling commodity prices are usually an indicator of flagging demand and a weak economy, right? So, what’s going on here?
Few would deny that the global economy is faltering: Europe is sinking further into the abyss; America has yet to suffer the most serious consequences of sequestration and fiscal drag arising from Federal spending cuts and January’s payroll tax hike; and the major emerging economies are slowing as demand for their exports continue to erode.
So you tell me, which market — equities or commodities — is most accurately reflecting economic realities?
The key here is that the trading models and strategies that are driving gold lower and equities higher do not rely of real-world economics . . . but take their cues from internal market triggers where time horizons for successful trading may be measured in seconds.
As we have discussed long before most other gold analysts and commenters have even noticed, the battle for gold has been between physical markets and paper markets. And, for the last year and a half, it looks like the paper markets have won out.
This despite the fact that the physical markets have been super strong with intense demand for bullion bars and retail investment products . . . and from a number of central banks who are using episodes of price weakness to augment their official gold holdings.
Many of these buyers - both private sector and official - have a long-term perspective and allegiance to the metal, often accumulating gold with the hope and intention of passing on their holdings to future generations.
In contrast, traders and investors in the paper markets have much different motivations and often very short-term perspectives. To an important extent, they are trading for short-term gains and will take positions in one asset market or another based on their perception of relative return.
Unlike many physical buyers, the paper traders rarely have any long-term allegiance to the metal. They may be in or out, short or long, or arbitraging tiny price inconsistencies. Some of the biggest institutional players trade on both the regulated commodities futures exchanges (like the CME COMEX Division), regulated ETF markets (like the NYSE), and the largely unregulated dealer and inter-bank market where volumes can be huge but trades and outstanding positions may be invisible.
The abandonment of long gold-ETF positions built up over the past half-decade by hedge funds and other institutional investors and the short-term trading activities of a relatively small number of institutional speculators have together been largely responsible for gold’s steep price decline in recent months.
What could turn the price upward again?
It may be as simple as the depletion of long positions in paper markets — with selling by “weak hands” having run its course.
Or, it could be a revival of “safe-haven” demand — driven by renewed sovereign risk and fears of debt default by one -(or more) of the euro-zone nations . . . or even renewed talk of debt limits and default by the United States, unable to get its fiscal house in order.
Or, perhaps, it will take a rout on Wall Street — as equity investors realize the miss-match between equity prices and the state of the economy.
Or, maybe, it will take a step up in quantitative easing — in reaction to a string of negative economic indicators and deflationary fears — with still more bond purchases by the Federal Reserve.
Or, maybe a black swan, perhaps some unanticipated geo-political development, or some other event that strikes from out of the blue.
What do you think?
