Gold & Silver price drop!
Here is exactly what’s going on. Investors holding physical metal are buying. Period. None are selling unless they need to raise cash. Other dealers report the same. The Authorized Purchasers for the US, Canadian and other world mints report the same. Buyers outnumber sellers by 10 to 1 or more. Physical inventors are holding or buying.
So why is the price dropping? Well, if it isn’t physical holders, that leaves paper investors. The answer lies predominantly in the futures market, ETF vehicles like GLD and SLV, options and other derivative vehicles. (Remember, any investment instrument other than physical gold ownership, whether in possession or in a depository, is a derivative of physical gold). It is not possible, or very difficult, to redeem these instruments. These paper investors simply hold a derivative.
Let’s examine two paper products – futures and ETF’s:
Futures: If you have ever shorted a stock, you know that you borrow the stock from your broker in your margin account. You then sell the borrowed stock into the market with the hopes of buying it back later at a lower price, return the stock to the broker and realize the profit.
In the precious metals future market, you don’t have to borrow the metal from a broker or from the COMEX. You simply short (sell) a futures contract. No borrowing necessary. This is called a “naked” short. And, when the metal prices begin to fall, traders ‘pile on’ more shorts like children on the playground. The shorts smell blood in the water.
ETF’s: Many investors who buy ETF’s think they have bought gold and silver. They have not. All they have bought is a paper proxy for the underlying metal allowing them a “participation” in the sector.
ETF’s are predominantly held in brokerage accounts and retirement funds. When metals begin to decline, these are the first investors to sell. They come home at night, see that their portfolio is down and simply click the sell button and they’re out. Or, their brokers sell the metal portion of their account in order to preserve portfolio performance – against which they are measured.
As for the physical investors we hold and buy more if able.
Forecast: Very, very firm support at $1,550 gold and $26.75 silver. Silver is definitely a buy under $30.
All Things Considered – John’s Commentary:
Finally, I have seen these sell-offs time and time again. They fall faster and further than most would expect. It tries one’s intestinal fortitude. Stay the course. Prices will rise again.
Action to take: This is the point to start adding if you are able.
Quote of the day: “Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett
