From Greg Canavan in Wollongong: -- Thud! -- That was the sound of the gold price falling US$100 overnight. Michael Pascoe is probably penning an article on the bursting gold bubble as we write. We hope he is. It would encourage us to buy more. -- This is what a bull market does. It moves up relentlessly, dragging in all sorts of new converts. It makes long-time bulls feel good about themselves. So good they stop thinking as much as they used to and only see prices continuing to rise. -- But good bull markets twist and turn. The bull shakes investors and speculators off its back, preferring to take only the 'strong hands' along for the next upward leg, whenever that may be. -- The gold market has been just about the only game in town recently. While the equity market fell over the past few months, gold soared. That attracted speculators. They didn't care for the argument that gold is money. Or that gold is once again becoming an international store of value and pre-eminent global currency. -- No. They just saw some momentum and jumped in. But here's an important distinction. They jumped into the futures market. On margin. Speculators don't buy physical bullion. They buy paper gold. To do so they are only required to put down a small percentage of cash to gain a very large exposure to moves in the gold price. It's all about leverage to price moves. It's not about owning physical gold as a wealth protector. -- Now, if you're wondering why the gold price dropped a rather large US$100 overnight, here's the answer, or at least part of it: -- The CME Group, who owns and runs the COMEX gold futures market, just announced a margin increase of 27 per cent, effective from close of business on 25 August. -- That is a hefty increase and comes after a 22 per cent increase announced two weeks ago. -- So if you're a gold futures speculator and want to buy 100 contracts of COMEX gold futures (1 contract = 100 ounces), yesterday it cost US$742,500 to establish the position. On Friday, the same position will soak up US$945,000 of your cash. -- Importantly, the CME also hiked the maintenance margin by 27 per cent. Therefore, to maintain current positions going into Friday's trade, speculators will have to stump up more cash...or sell. -- BTW, at a $1,800 gold price, this initial outlay gets you exposure to $18,000,000 in paper gold. So you can see the huge leverage available to the speculators. And you can now see why they bailed en masse last night. -- The requirement for more cash was the starting point. And then selling begat selling. -- Of course, there is a political element involved. The COMEX is run by, let's put it nicely, the 'establishment'. They are on the side on the bankers and the government. They have an uncanny knack of raising margins right at the point where they can inflict as much downside pain as possible. They did it with silver a few months ago. -- This time, with the gold price sending warning signals about the woeful monetary management of the global economy, the CME raises margins to take effect on the very day Ben Bernanke is due to speak at the Jackson Hole central bankers gathering. Coincidence? -- And let's face it, the margin hikes were guaranteed to result in a sharp sell-off, given the 'overbought' nature of the gold price. Gold had risen for weeks on end and a natural correction was due. -- In an email update to our paying subscribers yesterday, we wrote: '...gold "should" correct so don't be surprised to see it retreat back to around the $1,500 to $1,600 level. Despite this, I'm not considering selling any gold... 'One of the hardest things to do is sit through a bull market and not be tempted to take profits. By taking profits, you feel good in the short term. But you also trigger a tax liability and then wonder whether and when to get back in. I'd prefer to sit and ride the bull market higher. 'While I think we have reached a short-term peak, I don't think the bull market is over by a long shot. 'The only caveat I would make to the above recommendation is if you have made good gains in gold and feel you have too much exposure, take profits to cut back a little bit.' -- The point is, markets correct. But also understand the CME is amplifying this correction through highly selective timing of margin increases. Don't get us wrong. Margins should increase as the underlying metal price increases. This ensures leverage doesn't get out of control. -- The way it is done though is highly suspect. Why anyone chooses to play in the COMEX futures market is beyond us. Obviously it's the lure of leverage. But at certain points the odds are stacked against you. Still, the speculators keep coming back for more. After this latest beating, you can be sure a new bunch will be back again. -- We would guess that gold is now in for a few months of correction/consolidation. But unless the world's major central bankers commit to bring real (inflation adjusted) interest rates back into positive territory, gold will continue to march higher. You can make up your own mind whether you think that will happen. -- So if you own physical gold you have little to worry about. Simply use this golden waterfall to buy more. -- We were going to write about BHP's massive profit today. But when we saw the gold price decline we spilt our coffee over BHP's report and binned it. We'll get to it tomorrow and discuss why such a heavy reliance on China poses such a short-term risk to companies like BHP and Australia itself. Greg Canavan for The Daily Reckoning Australia
I like to think of it more like a rollercoaster than a waterfall! I've even added an extra part of the ride for Friday
http://www.bullionbaron.com/2011/04/aud-gold-pascoe-indicator.html Great article from the Bullion Baron
I sold 10% when it went back down below 1900, 1897 I think. Then I bought 5% at 1750 and 10% more at 1730something. I'm a long term bull, I don't own a helluva lot right now, but with more dips in the future I expect to within the next year. I will always dump 10% when it runs high and quick, if for no other reason than to free up cash to increase my net holding when it dips, which it always does.
I plan on doing the same when I have more oz.s I don't have much now and I'm just stoked about actually building a small stack. I try to purchase on the dips last 3 times I bought were 1590 ish, 1603-5 and 1737. I try to wait for the drops but that last one took a while. Glad I held out and didn't buy in the high 1800's though
Just curious, how high before you would sell some, take a profit so you could buy more the next dip? 1900 seems to be my point now, I waited a tad too long last time, I thought it might actually be on it's way to 2k. If it had, I would have just sold 10% more. Anyway, just curious to see what other people's strategies are. I'm trying to turn a molehill into a mountain on a budget LOL
I think if it breaks 1900 again and if I have 5 oz of gold stacked I'll sell one and wait for a drop and see if I can buy back a 1 oz and a 1/10 oz. Right now I only have about 2 oz all in fractionals so I'm holding until I at least double that stack. Same goes for silver I have 2 x 10 oz bars ready to trade for gold as soon as the gsr breaks 38-39 again.
I think the margins are high and the liquidity is a bit thin/pain in the bottom if you plan to trade your PM's. I'm use to trading stock which is obviously liquid with no margins and low bro, so I find short term trading PM's a bit odd. If you are thinking of just playing the short term gain, maybe buy some paper gold, sell it when it runs too hard, and buy physical in the dip? Anyway, just rambling now.
In an interview with Robert Kiyosaki, he said that the "suckers" will buy into gold when it breaks $2000. My expectations were always when it does break $2000 there will be a pullback but im convinced this wont be the end of golds run, maybe something to look out for well see
Ill listen to the big RK but i just dont take all he has to say fully on board. Gold will go much higher! Perhaps he just wants more for himself? Or i am completely wrong, he is right and i have been suckered into this gold and silver scam............um.....me thinks not.
I think what hes saying is more along the lines of... when gold has a big speculative run up quickly and goes past $2000 and alot of people new to investing in gold buy into it because it will make headlines etc gets them interested then pulls back to $1600 and these people get burnt not fully understanding what investing in gold is all about Thats just an example of what i think he means I listen and take in what Peter Schiff says about gold and it not being a bubble and his opinion on it. I also like what RK says about holding his wealth in gold/silver I think thats a good view to have. I know its not going to make me rich I just want to preserve my wealth in the long run
