Paper On, Paper Off – Gold On, Gold Off
The stock market is soaring. The gold (and silver) market is tanking. Why?
It is part irrational exuberance and part paper intoxication.First, the Dow Jones industrial average rose 175.24 points, or 1.2 percent yesterday, February 27th, to 14,075.37. The index is only 89 points from the record close of 14,164 that it posted in October, 2007.One widely reported reason is the inconclusive outcome of an election in Italy, renewing worries that Europe’s fiscal crisis will worsen. Since when does a rumor in Italy drive the Dow? Answer: It does today. Risk on – Risk off.Sure, corporate earnings are positive (maybe because payroll costs are down?) But really, why on earth should the Dow be at 14,000+? Ask yourself. In our gut, we know it just isn’t right. Something is wrong. What do the people getting in to the market today expect? For the Dow to gain 10%, it would need to rise to 15,400! Remember, for every buyer there is a seller. So who’s selling? The smart money?
And, is the US economy in such great shape? Europe is even worse off. Monetary expansion and poor fiscal policies plague virtually every nation around the globe.
Second, two days ago Bernanke confirmed his commitment to QE with comments such as it will last “for as long as needed”, “until substantial labor market gains are seen” and “inflation is currently subdued and well anchored”. Easy money is not going away. Money has to flow somewhere, and much of it is flowing to the equity and bond markets as mortgages and corporate lending have not regained lost ground.
Finally, February’s 3.8% drop in the gold price resulted in an outflow from the GLD gold ETF which accounts for more than 5% of its total holdings! 5% in one month! This is the largest monthly outflow since its 2004 launch!
Paper investors are in gold and silver panic when they come home after work and see losses day after day. They hit the sell button (very easy to do on a computer) and move the money to another sector.
This contributes to pressure on the spot prices. Then add short selling on the futures market and puts on options and you have a bait ball feeding frenzy.
Meanwhile, virtually no one in the physical market sells. While they both say they invest in gold and silver, one invests in the sector and the other holds the tangible asset. One is fickle and one is stalwart.
Paper holders buy a proxy on the gold/silver price. They want nothing more than a participation in the sector. And for many, when they see red, they are out. When we see red, we are more interested in buying more.
