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  • Physical Gold vs. Paper Gold: The Ultimate Disconnect



    How can we explain gold dropping into the $1,300 level in less than a week?

    Here are some of the factors:

    George Soros cut his fund holdings in the biggest gold ETF by 55% in the fourth quarter of 2012.
    He was not alone: the gold holdings of GLD have contracted all year, down about 12.2% at present.
    On April 9, the FOMC minutes were leaked a day early and revealed that some members were discussing slowing the Fed $85 billion per month buying of Treasuries and MBS. If the money stimulus might not last as long as thought before, the “printing” may not cause as much dollar debasement.
    On April 10, Goldman Sachs warned that gold could go lower and lowered its target price. It even recommended getting out of gold.
    COT Reports showed a decrease in the bullishness of large speculators this year (much more on this technical point below).
    The lackluster price movement since September 2011 fatigued some speculators and trend followers.
    Cyprus was rumored to need to sell some 400 million euros’ worth of its gold to cover its bank bailouts. While small at only about 350,000 ounces, there was a fear that other weak European countries with too much debt and sizable gold holdings could be forced into the same action. Cyprus officials have denied the sale, so the question is still in debate, even though the market has already moved. Doug Casey believes that if weak European countries were forced to sell, the gold would mostly be absorbed by China and other sovereign Asian buyers, rather than flood the physical markets.
    My opinion, looking at the list of items above, is that they are not big enough by themselves to have created such a large disruption in the gold market.

    The Paper Gold Market

    The paper gold market is best embodied in the futures exchanges. The prices we see quoted all day long moving up and down are taken from the latest trades of futures contracts. The CME (the old Chicago Mercantile Exchange) has a large flow of orders and provides the public with an indication of the price of gold.

    The futures markets are special because very little physical commodity is exchanged; most of the trading is between buyers taking long positions against sellers taking short positions, with most contracts liquidated before final settlement and delivery. These contracts require very small amounts of margin – as little as 5% of the value of the commodity – to gain potentially large swings in the outcome of profit or loss. Thus, futures markets appear to be a speculator’s paradise. But the statistics show just the opposite: 90% of traders lose their shirts. The other 10% take all the profits from the losers. More on this below.

    On April 13, there were big sell orders of 400 tonnes that moved the futures market lower. Once the futures market makes a big move like that, stops can be triggered, causing it to move even more on its own. It can become a panic, where markets react more to fear than fundamentals.


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  • Rabindra Kayastha

    Authorized Person for MEX NEPAL
    Mob: +977 9856030634

  • Pawan Dhakal

    Biratnagar Branch Manager
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