Fed Throws Cold Water On Gold Rally

Posted: Aug 25, 2012 12:01 AM

The Federal Reserve didn’t completely dismiss the idea of additional stimulus; they just pushed it back to September or October at the earliest.  Gold traders jumped on the news to take profits on prices we haven’t seen since March and April. 

Gold was off $2.67 in early trading to $1,665.75 and silver was off $0.05 to $30.36, with a silver/gold ratio of 54.8. 

Part of what makes me suspicious of this gold rally is all the stories in the media about buying gold and price predictions that run from $2,000 to $4,500 an ounce.  I remain skeptical; we’ve been to this rodeo before. 

If you’re worried about missing $4,500 an ounce gold, then buy all means put your gold order in now; don’t let me rain on your dreams.  I’ve just seen too many small investors mauled by the stampeding herd when they get spooked and markets suddenly change direction. 

Do keep in mind that the spot price for gold is set by electronic trading of gold futures.  Those prices are subject to the same kind of manipulation we see in derivatives trading in equities.  Prices can spike up and down in the span of minutes. 

The physical gold market moves at a more stately pace.  Most of the time the buy and sell prices are a margin above or below the spot price, but those margins are not fixed in stone.  During times of parabolic price spikes gold dealers can run into problems with inventory and cash flow, just like any other business that trades commodities.  You may find that those margins can become quite steep during times of market volatility. 

Gold and silver are just like a car, refrigerator, real estate or any other hard asset,that you might be trying to sell.  Any solid thing is “worth” exactly what someone else will pay you for it, regardless of what the spot price says it should be worth. 

That’s why I encourage small retail investors of precious metals to buy and sell in small lots over a long period of time and to trade at the margins of bull rallies instead of trying to mix it up with the herd where it’s easy to get trampled.  Yes, you may leave some money on the table trading cautiously; that’s the risk you take being careful. 

As I stated above, if you think gold is going to $4,500 or even $2,500 and you have the money to spare, have at it.  As for me, I’m going fishing. 

Chris Poindexter, Senior Writer, National Gold Group, Inc