More stop orders were triggered today on the gold markets, although there are other underlying factors weighing on prices. Quickly, though, let's briefly discuss stop order selling. Let's say that in mid to late February you bought gold at $1558. The price rose and rose until it hovered around 1590. You were $30 to the good. Then it rose to $1605 and you figured you had better guarantee your profits so you initiated stop orders at different price points. As gold first declined from 1605, and continued to decline, you were sold out of various contracts at various levels. So were your fellow traders, each of you affecting the next person, back and forth, lowering the price each time. Now imagine this simplified scenario on a macro scale. Of course, something fundamental lies beneath the original price back-off that then turns into the cascading drop in price via stop orders.
Let's round up the usual suspects and a few less likely ones.
The chief suspect, public enemy number one from a gold bull's point of view, is the American equities run up. The P/E ratios had gotten just too juicy for institutional investors to resist, so they took a bite of the fruit. It tasted good and another and another bite soon followed.
The second culprit, and possibly more important than stocks, comes in the form of U.S. Treasury issues. These are particularly appealing to foreign countries' central banks with big dollar reserves, or for those countries' investors who have their money in cash instruments that have come due recently. People are beginning to think that the treasuries are the safest investments in the world. Inflation is low, the U.S. economy is perking along at a decent but unspectacular pace. Their own countries' offerings are scary. Third, Europe for all its trials and tribulations, seems to be headed into the straits between a rock and a hard place. Growth is slow, unemployment is high, and some E.U. member countries have shaky coalition governments, which could change monetary and budgetary stances at any time. The euro itself, on the current grand scale, is a question mark. Nature abhors a vacuum. Finance abhors instability. Fourth, China's growth is slowing. It seems spectacular to most of us in the developed world, but a drop from over 9% to just under 7% is bad.
So gold is caught betwixt and between just at this moment. It is having trouble gaining traction as a safe haven, because other alternatives are around. It is not an inflation hedge because, well, there is scarcely any inflation. We can't live in a state of permanent stasis. And, there is plenty of money to be made by taking rides up in what is currently a sideways market then standing on the sidelines when the price reverses. Even as we write, gold is $7 above its low of roughly 1550. Bargain hunters have stepped in.
As always, wishing you good trading,
Gary S. Wagner - Executive Producer