Gold Down Sharply

Posted: Nov 29, 2012 12:01 AM

Gold and silver were down sharply in early trading on Tuesday as industrial commodities across the board took a header in a surprise selloff. 

In just the first few minutes of trading gold was down $25.44 to $1,715.38 and silver was off $0.64 to $33.36 with the silver/gold ratio creeping up to 51.4.  Gold had plenty of company in the commodity selloff with crude oil, copper, platinum and palladium all trading lower and beating the currency spread by a wide margin. 

So what’s behind the big selloff?  One analyst says this, another says that, all we know for certain is that softness in the European economy seems to be the driver as the red ink was kicked off by a big surge in the dollar against the euro. 

The perverse thing about investing these days is sometimes there’s no way to tell what triggers a major correction.  With most trading being handled by high speed computers it’s not always logical why they get a burr under their digital saddle.  The price of gold is not determined by traders actually exchanging gold bars for cash or trade.  The spot price of gold is set by the buying and selling of futures contracts on the London gold market.  Futures are a type of derivative trading instrument and most of those trades are settled in cash. 

It does point out that derivatives are yet another ticking time bomb in the world of global finance.  The derivatives market is so big no one can actually hang a number on it.  The best guess by economists right now is the global derivatives market is something on the order of $1.2 quadrillion dollars.  That fantastical figure is 20 times the world’s GDP. 

What could possibly go wrong with an unregulated financial market that trades in secret and dwarfs the actual output of the entire planet by double digit multiples?  We got a taste of what happens when just one type of real estate derivatives ran into trouble in 2007.  I’m not one to traffic in conspiracy theories but the reality of the derivatives market is far more frightening than anything I could make up.  If there ever were a global economic collapse, derivatives would be the powder keg that sets it off. 

Derivatives are funny paper loosely connected to some physical commodity and the more derivative layers tied to that commodity, the higher it inflates the asset value.  Your best defense against the asset inflation that derivatives propel is to hold the actual physical assets. 

That’s why I stress physical possession over paper instruments like ETFs for holding your gold and silver.  I just don’t trust Wall Street and the derivatives market is even bigger than they are. 

Chris Poindexter, Senior Writer, National Gold Group, Inc