Gold continues to confound, dropping another $25 an ounce this morning as technical and computer-driven program trading triggers selling on U.S. derivative markets, all despite favorable fundamentals and what should be seen as favorable economic and geopolitical developments.
Gold Lower Despite Bullish News
This morning’s dispatches from India and China, the two biggest gold-consuming nations, report that demand in these markets continues unabated . . . and coin dealers report still-strong retail demand for bullion coins and small bars in the Western markets.
News from the Middle East — Israel’s air strikes on Syrian targets and the rising potential for an escalating conflagration — in days of yore would have been sufficient to send gold prices skyward.
Meanwhile, this morning’s news from the Australian central bank that it was cutting its key policy rate to a record low, following last week’s rate cut by the ECB, and Fed Chairman Bernanke announcement that America’s central bank stands ready to step up its monthly bond purchases if the economic environment remains questionable — these monetary-policy moves taken together along with similar easing by other central banks — suggest the global economy may be entering a “competitive devaluation” “beggar thy neighbor” competition in which the only real winner will be gold.
The underlying gold-market theme in recent days, weeks, and months has been and continues to be selling of paper gold derivatives, including gold ETFs and futures, and over-the-counter dealer and interbank trading in Western markets and, all the while, strong physical demand for bullion products and investment-grade jewelry mostly in Eastern markets.
The Paradox Explained
Importantly, much of the activity in dealer and interbank trading goes unreported — with selling and “high-frequency trading” by the “dark pools” of liquidity at crucial chart points in order to trigger and profit from the bigger waves of selling that follow.
Much of this undercover activity is made possible by the Fed’s near-zero interest rate policy. The dealers and traders that comprise these dark pools are so profitable precisely because their cost of money is so low and the availability of liquidity is seemingly unlimited.
Indeed, this machine-driven trading activity at least partly explains the paradoxical failure of gold to move higher — as should be expected during a period of super-accommodative, highly reflationary, monetary policies pursued by the Fed and other major central banks around the world.
While some of this low-cost liquidity is funding the “bubble” on Wall Street, along with some small recovery in the U.S. housing market, and even strong physical gold demand around the world, it is also funding this dark pool trading activity that has been pressuring gold to incrementally lower price levels.
If this were a sic-fi movie it might be titled “Invasion of the Machines.” And, just like the movies, the good guys — those with patience who have trusted the long side — will win in the end.
