Gold Rout Continues

Posted: Mar 14, 2012 12:01 AM

It’s starting to look like the week's down market wasn’t merely a case of the Monday blues or positioning options; gold prices are actually moving down. 

Gold is down $14.50 in early trading to $1,685.60 and silver is off $0.44 to $33.21, raising the silver/gold ratio to 50.7.  The larger the silver/gold ratio, the number of ounces of silver it takes to buy an ounce of gold, the more bullish the indicator for silver prices. 

While things aren’t looking good for commodities prices in general and gold prices in particular, I’m not prepared to revise my outlook about gold prices for the week.  It’s still early; a lot can happen. 

Besides, continued price erosion in gold and silver prices means better buying opportunities ahead. 

In the old days the gold and silver market was of interest to a relative handful of people.  For the most part institutional investors, large commercial investors who get preferential treatment in the trading markets, stayed away from commodities. 

Today that’s all changed.  As the derivatives market has grown, more institutional investors have started playing commodities.  I say “playing” because the whole market has turned into a giant casino where institutional investors pit their program trading algorithms against one another. 

The overwhelming majority of trades in commodities markets today, something on the order of 70 percent, are institutional trades.  Those trades are largely settled in cash, a situation that brings the same kind of volatility we’ve gotten used to in equity markets to normally sedate commodities like gold and silver. 

That’s why you hear me harp about physical possession of gold and silver so often.  Trying to invest in gold with exchange traded product, like ETFs, puts you on a playing field with people who get a better deal when they trade.  Institutional investors get faster trades, they get more of them, and they get private placement deals that you and I will never see.  You don’t want to try competing in that arena. 

Your best option is to opt out of the trading game and deal in physical gold and silver.  That will insulate you from market shenanigans and, if it all comes crashing down one day, you’ll have something to trade with relative value, not handfuls of worthless paper. 

Chris Poindexter, Senior Writer, National Gold Group, Inc