The Coin Analyst: Electronic Trading Smashes Gold and Other Precious Metals Despite Strong Physical Demand
by Louis Golino for CoinWeek ………
Over the course of the last two trading days, April 12 and 15, gold has suffered its worst decline in dollar and percentage terms since 1983, going from almost $1600 to about $1350 in the past week . A drop of 10% and $250 definitely gets the attention not just gold of buyers and sellers, but of the entire financial community.
All day on April 15 the financial media was talking about virtually nothing else but the collapse in gold prices until the news of the apparent terrorist attacks at the Boston marathon. Silver is also down very sharply, declining 10% just on April 15 to a little under $23.
Meanwhile, physical demand is at a virtual frenzy, with premiums rising sharply on all kinds of coins, especially American silver eagles and one-ounce American gold eagles. And the web sites and servers of bullion dealers have been so overwhelmed that it is difficult to place an order.
The U.S. Mint has suspended sales of several silver coin products for repricing, and buyers are eagerly awaiting the chance to get some great bargains. Plus, the 2013 proof American gold eagles are slated for release at the end of the week, and prices should be very attractive, possibly driving sales higher than last year’s low mintage coins unless buyers are worried about gold falling further, which is the consensus view among the financial gurus on Wall Street.
This leads naturally to some big questions such as why such a huge drop so quickly and across the spectrum of precious metals, and why is there such a disconnect between the spot price and the physical price of precious metals, especially for bullion coins?
Everyone has their own theory, but the main cause of the collapse in gold and silver prices, and more moderate drop in platinum and palladium, is a combination of massive withdrawals of paper gold in the form of ETF’s (exchange-traded funds) and a shift in sentiment away from gold in light of a well-performing stock market this year and increasing talk of less QE in the coming months.
Three particular catalysts were: the forced sales of over $500 million in gold owned by the central bank of Cyprus; the COMEX paper sale for a June contract on April 12 that amounted to $20 billion of gold, or 15% of annual production; and a bearish call by Goldman Sachs. The COMEX speculators only had to put up 5%, or $1 billion, to go short gold with this bet, and they won big by Monday; and Goldman Sachs, whose views are given great credence in financial circles despite their role in the housing bubble debacle, issued a very bearish call on gold last week, advising investors to short the metal.
The Cyprus sale of central bank gold is probably not in itself a very significant driver of current trends because of the small amount of metal involved, except, as Barry Stuppler explained in his Weekly Market Report that it marks a major precedent in which European central banks can be forced to sell their gold to cover losses in the banking field.
In addition, last week’s Federal Reserve meeting minutes, which were accidentally leaked half a day in advance, showed the Fed to be sharply divided over whether to continue QE and at what pace, which helped start the shift in sentiment on gold.
But the increasing emphasis on the possibility of a reduction in the Fed’s asset purchases, or even a rise in interest rates, seems to me premature and at odds with the two key factors, namely, the slowing pace of the economic recovery and continuing high levels of unemployment. And those are the two factors that Fed Chairman Bernanke has made crystal clear need to improve to specific levels before QE will change. So people may be misreading the financial tea leaves regarding QE.
The financial community, which always seems to enjoy highlighting declines in gold prices, seems certain that a floor has not been reached in gold prices and is probably right in the short-term. You can’t “catch a falling knife,” is a favorite catchphrase. More substantively, it is believed that many billions of dollars more of gold will come out of gold ETF’s in the coming days, partly because of margin calls and other forced liquidation. And the big drop in equities on April 15 will not help, as investors look to sell gold they bought cheap to cover stock losses.
The disconnect between spot prices and what people are actually paying for physical metal has become the widest since the last major drop in metals in 2008. And as many people have noted, the big decline in metals that year presaged the crash of the stock market, which drove metals even lower.
But I don’t think 2013 is like 2008. A lot has happened since then. The equity markets may be overly optimistic about U.S. economic growth, and are probably due for a correction from recent highs, but I doubt a major crash is coming in those markets. Central banks around the world have shown since 2008 that they will, as ECB chief Mario Draghi famously put it, “do whatever it takes” to defend the financial system. He was speaking of the euro, but that is even more the case for the U.S. Fed, which has shown time and time again that it will intervene to whatever extent it sees fit to prevent systemic collapse, though some day events could outpace its ability to act.
Looking forward, I am still inclined to be bullish for the long-term on metals as usual because of fundamentals. Lower prices are clearly bringing out more buyers, but in order for that to actually move the market in a major way we need to see Indian buyers come back in, and central banks around the world need to continue their recent pace of buying, which seems especially likely after this major correction in gold prices.
The problem is that ETF’s and other computer-driven trading in metals can turn a relatively minor shift in sentiment into a real bloodbath in a very short period of time, as we have just seen. And the fact that gold did not go up in the face of recent reports of increased tensions between North Korea and the U.S. was troubling as well.
The true believers in gold and other precious metals probably got carried away with their predictions and became a bit too sure about their convictions. But I also highly doubt the current predictions of gold bears that it is heading to $1,000, short of a major stock market and economic collapse on the scale of 2008.
Long-time gold bulls such as Marc Faber, author of the Boom, Gloom, and Doom Report, and Jim Grant, author of the Interest Rate Observer, not to mention mega-investors like John Paulson, who reportedly lost over a billion on paper over the last couple days, think the gold bull market still has legs, and Paulson has said he is not selling. Be patient, and better days should be coming.
Plus, a great buying opportunity is about to present itself if you are a long-term investor. And don’t just stick to bullion. Semi-numismatic coins from the U.S. and other mints with low mintages can be had for small premiums these days, and represent excellent choices in my view.
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for CoinWeek, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.