Why are gold and silver tanking so rapidly?

[Nicolasd]

Re: Why are gold and silver tanking so rapidly?

Thanks for the clarification,I was not aware of the huge difference in taxation between those asset classes

Nicolas

[FRED]

Re: Why are gold and silver tanking so rapidly?

EJ,

I don't understand very well the relationship between changes of margin requirements vs reduction of gold price.

If margin requirements are changed across both equity and commodity markets, then the sell-off will trigger a correction in both markets

If margin requiremements are changed for the commodity markets only , then equities closely associated with those commodities will also correct.

Seems the Fed has worked too hard and for too long to artificially support the equity market , at great costs , to risk and entertain increased volatility in the equity markets.

Also, if too much attention is paid to hard assets by the authorities , wouldn't there be a risk that it becomes counter -productive as J6P may smarten-up and invest in those hard assets ?

EJ replies:

Changing margin requirements are a classic method of government regulation of speculative markets. If speculators can borrow $1000 against $10 to invest in an asset then when that requirement is raised by law from 10:1 to, say, 8:1 and only $800 can be borrowed against $10 of capital, naturally this results in a lowering of the price of the asset purchased on margin.

In the case of gold, as you say this will also have an impact on the prices of gold mining stocks. My point is that margin requirements for equities trading generally could have been raised in 1999 to slow the stock market bubble but were not. Now changes in margin requirements are being considered in order to manage speculation in hard assets which authorities apparently deem to be "excessive." This selectivity is in line with tax code; the long term capital gains tax rate on stocks is 15% but on gold, even ETFs, it is 35%. Thus between changes in margin requirements and tax policy it is not hard to understand which asset class the government wants US citizens to own, is it? But all J6P knows is that the price of one is going down and the other up. He will not bother to investigate why this is the case and he's not likely to hear the matter mentioned on Jim Cramer's show.

[Sapiens]

Re: Why are gold and silver tanking so rapidly?

I didn't say ECB, I said EU. Furthermore, think about what this is all about...
http://en.wikipedia.org/wiki/Treaty_of_Lisbon

[GRG55]

Re: Why are gold and silver tanking so rapidly?

ouroboros = infinity or cyclicality.

In this case, I believe Sapiens ("wise man") means cyclicality.

Further reading his tea leaves, to answer krakknisse; Sapien's reference to wait until the ECB cries out is a reference to their pain related to a weak dollar no longer supporting their exports of BMW's and the like. As Lukester also points out when the ECB starts making noise about devaluing the Euro to keep European exports more competitive, that will be mark the beginning of the race to the bottom for fiat currencies among major exporting countries.

As for PM's, I agree with the sentiment that this gold bounce is a counter trend rally and we will see another test of lows or perhaps even lower to form a double bottom (sorry Eric, I know you dislike technical analysis) before the rally begins again. ouroboros QED

Sapiens, or anyone else waiting for the ECB to cry out in pain, may have to wait a while longer based on Trichet's comments today. I watched his press conference live and there's no indication in the body language there's an imminent rate cut coming. Note especially the phrase "inflexibly attached'' in the final paragraph.

Trichet Says Interest Rates Will Curb Inflation Risks

By Gabi Thesing

March 26 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said interest rates at a six-year high will help curb inflation in the 15 nations sharing the euro, suggesting he sees no immediate need to cut borrowing costs.

``The current monetary-policy stance will contribute to achieving our price-stability objective,'' Trichet told European lawmakers in Brussels today. ``In the Governing Council's view, the risks to the medium-term outlook for inflation are on the upside.''

The ECB has resisted pressure to follow its counterparts in the U.S. and U.K. and cut rates in response to a global surge in credit costs and slowing growth. Trichet noted that German business confidence unexpectedly rose in March and said inflation, which is running at the fastest pace in 14 years, will stay above the ECB's 2 percent limit for most of this year.

``Inflation developments support Trichet's assessments,'' said Holger Bahr, an economist at Dekabank in the Frankfurt. ``There are no reasons for the ECB to deviate from its path.''

The euro, which jumped more than a cent after today's German business confidence report, extended its gains as Trichet spoke and traded at $1.5735 at 12:55 p.m. in Frankfurt...

...While Trichet conceded that ``uncertainty about the prospects for economic growth remains unusually high,'' he stressed the ECB remains ``inflexibly attached'' to its price-stability mandate...

http://www.bloomberg.com/apps/news?p...e8k&refer=home

[BiscayneSunrise]

Re: Why are gold and silver tanking so rapidly?

ouroboros = infinity or cyclicality.

In this case, I believe Sapiens ("wise man") means cyclicality.

Further reading his tea leaves, to answer krakknisse; Sapien's reference to wait until the ECB cries out is a reference to their pain related to a weak dollar no longer supporting their exports of BMW's and the like. As Lukester also points out when the ECB starts making noise about devaluing the Euro to keep European exports more competitive, that will be mark the beginning of the race to the bottom for fiat currencies among major exporting countries.

As for PM's, I agree with the sentiment that this gold bounce is a counter trend rally and we will see another test of lows or perhaps even lower to form a double bottom (sorry Eric, I know you dislike technical analysis) before the rally begins again. ouroboros QED

[tree]

Re: Another question: Why is gold and silver tanking so rapidely?

Unlike oil, real estate, or many other commodities, gold has no significant intrinsic value. It has as much value as sand dollars you can pick up on a beach, really.

You can't eat it, you can't live in it, you can't fuel your car with it.

The fact is, if gold really had any value, we'd probably try to create it from depleted uranium or something. But it doesn't have any value, so we don't bother, and gold bugs bid it up like rare stamp collectors.

Not that anyone around here is like that! ;)

Basically, I agree with Tulpen that it is in a speculative bubble. If you really feel the need to hedge/speculate against the dollar, I'd listen to Jim Rogers, and plow into agriculture or many of the other necessary things we need to live. There is a big difference between structural problems with the dollar and buying gold to defend against those structural problems.

I could believe that gold could go to 2000 and still not buy it. I have this general rule about only buying things that I think are relevant to the real, productive world.

BTW also, look at gold history. Gold bugs can talk all day long, but they can not deny the historical volatility. If you're OK with that, then I suppose it's your game. Those long term graphs look like a casino to me, though. I could not sleep with my money in gold, knowing that the IMF or whoever could just bail on gold overnight.

Not exactly right. You can't make jewelry out of sand dollars. Well, may a string of them for a necklace, but that would lose its charm fast.

[Sapiens]

Re: Why are gold and silver tanking so rapidly?

Lukester,

Ouroboros.

-Sapiens

Re: Why are gold and silver tanking so rapidly?

Sapiens -

I don't buy that the capitulation of Euro interest rates vs. the USD will weaken gold A-TALL. Seems to me it will only increase the general un-mooring effect, as the entire basket of global currencies drift even further away from ability to provide any strong counter pole to the disintegrating USD. Gold should benefit when the Euro, the supposedly strongest alternative to the USD, starts to follow the dollar down by loosening it's rates. How can gold suffer from that?

I refer you to Evans Pritchard's description of the state of the world's currencies in 2008 (you probably read it already and concluded it had little merit?). How do you conclude, in the midst of this scrapheap of "senior currencies"which ALL define themselves only in relation to the USD, that any one of them is destined to be favored over Gold, going into 2009? Seems a considerable leap of faith to me. Am I merely buying into some worn out popular wisdom here?

Ambrose Evans-Pritchard: Here comes the worldwide currency debasement - Foreign investors veto Fed rescue

By Ambrose Evans-Pritchard, International Business Editor http://www.telegraph.co.uk/money/mai.../ccview117.xml

[Nicolasd]

Re: Why are gold and silver tanking so rapidly?

EJ writes in:

The chart above is from my keynote presentation at the Hard Assets Conference in Las Vegas Aug. 2007.

The new gold bull market began when the US depreciated the dollar unilaterally from 2001 to 2004; gold prices increased against gold but not much against other currencies. When other central banks depreciated as well from 2004 to 2006, gold increased in other currencies as well. In fact, all commodities increased in unison. The one-way bet nature of this competitive depreciation was amplified by speculators.

Since the US-centric credit crisis began in 2007 the US dollar began to fall due to economic and financial risks. Gold increased in dollar terms but less in euro terms as the dollar depreciated against the euro. Again, speculators betting on the Fed's response doubled down using leverage.

When European governments again weaken the euro to reduce the impact of a weak dollar on their exports and to fight debt deflation, gold will rise in terms of other currencies as well. There is no evidence based on the 2001 - 2006 period to suggest that this will reduce the dollar price of gold.

That said, I am still expecting a correction in gold prices driven both by a demand scare and government intervention via changes in margin requirements. This is what the government could have done to reduce speculation in the stock market before it got out of hand in 2000 and again now (margin debt is back up to $328B near its peak of $381B before the credit crisis began). However, as a policy the US government approves of stock market speculation but not commodities speculation.

EJ,

I don't understand very well the relationship between changes of margin requirements vs reduction of gold price.

If margin requirements are changed across both equity and commodity markets, then the sell-off will trigger a correction in both markets

If margin requiremements are changed for the commodity markets only , then equities closely associated with those commodities will also correct.

Seems the Fed has worked too hard and for too long to artificially support the equity market , at great costs , to risk and entertain increased volatility in the equity markets.

Also, if too much attention is paid to hard assets by the authorities , wouldn't there be a risk that it becomes counter -productive as J6P may smarten-up and invest in those hard assets ?

[Sapiens]

Re: Why are gold and silver tanking so rapidly?

There may be better answers, but here's mine. If whatever is ahead of us forces the ECB to lower rates, I take it that would weaken the Euro against the dollar or vice versa the dollar would strengthen. If the dollar strengthens then it will take less of them to buy gold, which I asume would show up as a decrease of the price of gold (and commodities) when measured in dollars.

Good stuff Jim.

http://www.the-privateer.com/gold5.html

See last comment on the linked page.

There is no evidence based on the 2001 - 2006 period to suggest that this will reduce the dollar price of gold.

Need to visit the 90's, also see this:

http://www.stanford.edu/~mckinnon/br...eJEPMKenen.pdf

Re: Why are gold and silver tanking so rapidly?

Erm ... physical bullion shortages may have that kind of anomalous effect ?? Jeez, seems like only months ago Silver couldn't get any respect. The Rodney Dangerfield of precious metals just got a makeover, huh? Now she's the Belle of the Ball all of a sudden?! :confused:

Re: Why are gold and silver tanking so rapidly?

You're probably right but there is a serious disconnect in the markets right now. Ebay is selling silver coins at 21+ when spot is showing 17-18. Apmex selling eagles for one day only at 2+ spot. I wonder what will happen if we get a leg down to 15ish.

I don't get iot...a KG of Silver going for A$800 on Ebay at the moment. Correct me if I'm wrong...that's about USD$22.65 per ounce! This is a KG...not even a coin!
The world's gone crazy Cotillion!

[FRED]

Re: Why are gold and silver tanking so rapidly?

There may be better answers, but here's mine. If whatever is ahead of us forces the ECB to lower rates, I take it that would weaken the Euro against the dollar or vice versa the dollar would strengthen. If the dollar strengthens then it will buy take less of them to buy gold, which I asume would show up as a decrease of the price of gold (and commodities) when measured in dollars.

EJ writes in:

The chart above is from my keynote presentation at the Hard Assets Conference in Las Vegas Aug. 2007.

The new gold bull market began when the US depreciated the dollar unilaterally from 2001 to 2004; gold prices increased against gold but not much against other currencies. When other central banks depreciated as well from 2004 to 2006, gold increased in other currencies as well. In fact, all commodities increased in unison. The one-way bet nature of this competitive depreciation was amplified by speculators.

Since the US-centric credit crisis began in 2007 the US dollar began to fall due to economic and financial risks. Gold increased in dollar terms but less in euro terms as the dollar depreciated against the euro. Again, speculators betting on the Fed's response doubled down using leverage.

When European governments again weaken the euro to reduce the impact of a weak dollar on their exports and to fight debt deflation, gold will rise in terms of other currencies as well. There is no evidence based on the 2001 - 2006 period to suggest that this will reduce the dollar price of gold.

That said, I am still expecting a correction in gold prices driven both by a demand scare and government intervention via changes in margin requirements. This is what the government could have done to reduce speculation in the stock market before it got out of hand in 2000 and again now (margin debt is back up to $328B near its peak of $381B before the credit crisis began). However, as a policy the US government approves of stock market speculation but not commodities speculation.

[Nervous Drake]

Re: Why are gold and silver tanking so rapidly?

.

[Jim Nickerson]

Re: Why are gold and silver tanking so rapidly?

Uh... why do you think the run-up in gold will stop when the ECB starts to ease monetary policy? (Am I misunderstanding you?) Wouldn't that leave very few safe havens? It's what I'm betting on...

There may be better answers, but here's mine. If whatever is ahead of us forces the ECB to lower rates, I take it that would weaken the Euro against the dollar or vice versa the dollar would strengthen. If the dollar strengthens then it will take less of them to buy gold, which I asume would show up as a decrease of the price of gold (and commodities) when measured in dollars.