Quiet As A Golden Mouse

Trading is, as you might suspect, very quiet today. Gold did show some modest strength on short-covering today, although as with all quiet trading days, any movements should be taken with a large grain of salt. The fewer contracts that move, the more exaggerated the price movement, regardless of the direction. We can expect this particular condition to persist until the Monday after the New Year.

A good old friend of ours wrote us an email today and, although he doesn't trade gold, he keeps up on financial developments to a certain extent. He asked:

Why is the price of gold dropping like a stone? What's so different "now" as opposed to 'then'? Is it like the B.S. prices of oil or is there a real reason?

Without getting into a long, drawn-out discussion of oil discovery costs, refinery capacity, demand and so forth, we all know that oil is a useable commodity and trades only about 10% of the time on conceptual issues. Gold is more or less the exact opposite.

Without getting into a long, drawn-out discussion of oil discovery costs, refinery capacity, demand and so forth, we all know that oil is a useable commodity and trades only about 10% of the time on conceptual issues. Gold is more or less the exact opposite.

We answered him as we would a beginner, which sometimes helps even the expert put his or her ideas in order. (Thus the book series "Such and Such For Dummies.")

Here is how we answered him:

Dear Mark,

There are a number of fundamental reasons that the price of gold has been falling for many months now.

The equities are so hot that they're the only investments drawing money. The quickening recovery of the U.S. economy is seeing to that and will probably only get more robust. That sucking sound you hear is money rushing toward Wall Street and other bourses.

Inflation seems to be incredibly tame. The promise of rock-bottom interest rates as far as the eye can see dampens any fear of inflation and therefore the price of gold, which often serves as a hedge against inflation.

Physical demand is down both in the wholesale/retail market and within the world of exchange-traded funds (ETFs). The former is due to a) India's high import tariff's, which has squelched that country's once-world-leading gold appetite, and b) gold's having fallen out of fashion with younger American consumers for reasons of taste and because of the relatively high price. The older generation's gold needs - think of yourself and your bling collection if you're over 45 - are saturated. The ETFs are a complicated story, but they are in this case stocks backed by stockpiles of bullion. They bought heavily through the late 2000s and into the first year of this decade. In short, they helped the price surge and bubble UP. When the upward swing of gold slowed, then stopped, they began to unload massive amounts of bullion on the market and helped the price cascade down. (We're talking 45 to 100 tons per month for the last 20 months.)

World politics are reasonably stable so shaky but rich governments aren't buying gold for their plutocrats.

Then there is simply the Big Mo - momentum. Once a commodity with a conceptual value begins to falter, there's nothing to act as a floor under it. (Unlike, say, soybeans, which eventually finds a floor because it is turned into feed or oil and the world needs those products badly.)

With all those fundamental forces arrayed against gold, technical (or pre-set) selling kicks in at various pre-set levels. Confidence fails... etc., etc.

As always, wishing you good trading,