Gold Down On Profit Taking

Posted: Aug 15, 2012 12:01 AM

This is one of those odd days in the market that gold is up but at lower prices than yesterday.  A round of profit-taking kicked in late yesterday and continued in overseas trading, shaving roughly $12 off the price of an ounce of gold. 

Gold is up $1.07 to $1,611.07 and silver is up $0.04 to $27.85, leaving the silver/gold ratio at a freakishly steady 57.8.  The silver/gold ratio has been so freakishly steady lately I ran the numbers by hand to make sure they were right. 

By way of a reminder, the spot price of silver and gold are not determined by actual physical trades but by a formula applied to futures trades.  During periods of low volume, like we typically find in August, the programmed trading in futures has more of an influence than times of more active markets.  What we may be seeing is one or more trading houses using the silver/gold ratio as a trade metric. 

Early trading in commodities was largely in line with currency moves, with the euro gaining back more ground against the dollar.  Gold and silver were joined to the upside by platinum, palladium, crude oil and copper.  From here I expect gold prices to drift back up to the $1620 range, but the chart may zigzag its way up there all week. 

This month’s experience with the silver/gold ratio has me wishing once again that we had an actual physical exchange rate market for precious metals.  Make no mistake, there would likely be a gut-wrenching adjustment in price at first as we all discover just how much the derivatives market really inflates the price of precious metals. 

With futures, options and other derivatives there are just so many ways for the big players to game the commodity markets the same way they game the equity markets.  Fake orders can pile up to boost the price and then be cancelled, all in time spans measured in microseconds.  Futures and options trades executed by high speed computers are almost all settled in cash, rarely does any actual gold change hands. 

The insiders that profit off this rigged game argue that their presence adds more liquidity to the markets.  Really, so what?  That’s like me saying if I slap your face repeatedly it will cause more blood flow to your cheeks.  It’s a meaningless argument, especially at a time the world is already awash in free cash. 

That’s also one of the main reasons I recommend physical possession; the gold in your safe is mostly out of reach of the high tech vultures on Wall Street. 

Chris Poindexter, Senior Writer, National Gold Group, Inc