This
Week in Barrons – 4-21-2013
Take Two they’re Small…
To quote Vishal Mehta (a garment dealer living in India): “I
usually buy one gold coin a month, but this time I’m buying two.”
Because I have received so many questions surrounding gold (and silver) allow me to address those elements first. The raid on Gold was truly a once in a lifetime event. In fact, the $140 drop in the price of gold was statistically a 4.88 standard deviation price move. We get this type of move every 4,776 years. So the sun is expected to burn out before another move in gold like this will be seen. Where the disconnect happens with me, is that in most areas price is set due to supply and demand. But, gold isn’t most things. Gold is a precious metal. The price of Gold is not determined by the number of people actually buying and selling the physical metal itself, but rather by the ‘futures’ market. The futures market is a ‘paper’ market (important point), and it is what happens in the futures market that affects everything else. Why trade something as valuable as gold on an exchange where paper futures determine the price of the metal? Because you can manipulate the price easier on the ‘paper’ market – than you can on the ‘physical’ market. For example, if the physical market determined the price, the only way prices could fall is if more people were sellers than buyers. But in the paper market, manipulators can knock down the price of the physical metal, without ‘actually’ selling the physical metal. In fact, in the futures market you can do something called a "naked short". Let's dig into that.
In a short sale – if you believe a stock (say ‘IBM’) is worth
$10 a share, but it’s currently trading at $20 – you can go to your brokerage
house and borrow 1,000 shares of IBM.
You would immediately sell those borrowed shares for $20,000 ($20 per
share * 1,000 shares). Then you would wait
for IBM to fall to $10 per share, purchase 1,000 shares of IBM for a total of $10,000
– and give those 1,000 shares back to the brokerage house where you borrowed
them. In the trade you get to keep the
$10,000 difference between $20,000 and $10,000 as your profit. This is a perfectly legal, ethical and well-architected
trade. The main difference in gold – is
that in the futures pits, no one is looking for ‘physical delivery’ of the
metal. That is to say it’s all about the
‘cash settlement’ in lieu of delivery.
So last week, ‘someone’ decided to sell 100 tons (3.2M ounces) of gold in a single trade. To put that into context, a large physical gold ‘trust’ – Sprott Physical Gold Trust (PHYS) – their entire holding is 1.6M ounces of gold. Adding insult to injury, quickly following that 3.2M-ounce sell order came another 9.6M-ounce sell order for gold. So in the span of 40 minutes, 14M ounces of gold were being sold on the ‘paper’ market. The market responded by falling like a rock.
But let’s take a step back. If you were a hedge fund that wanted to sell $24B worth of gold, you surely wouldn't dump it all on the market in one 40-minute session. You would sell that over weeks if not months so that you didn't crash the price. But this seller either didn't care about the price, or (something more evil), wanted the price to crash.
Since most futures trading is not based on ever taking physical delivery, but rather is all accomplished through a ‘cash’ transaction – we now have a different situation to consider. Given the sale of all that gold was most certainly accomplished without ever having to borrow the physical metal, the transaction would be called a “naked short". Because the gold market (in comparison to the currency market) is relatively thin in volume, the price fall was breathtaking. By flooding the system, and triggering a ton of self-defense selling algorithms, a buy back of gold could only really happen at the $1,440 level. On the 14 million ounces of gold transaction, someone lost over 1 Billion dollars. Not any single person or group of people could do that? But your friendly ‘Central Banker’ could.
So last week, ‘someone’ decided to sell 100 tons (3.2M ounces) of gold in a single trade. To put that into context, a large physical gold ‘trust’ – Sprott Physical Gold Trust (PHYS) – their entire holding is 1.6M ounces of gold. Adding insult to injury, quickly following that 3.2M-ounce sell order came another 9.6M-ounce sell order for gold. So in the span of 40 minutes, 14M ounces of gold were being sold on the ‘paper’ market. The market responded by falling like a rock.
But let’s take a step back. If you were a hedge fund that wanted to sell $24B worth of gold, you surely wouldn't dump it all on the market in one 40-minute session. You would sell that over weeks if not months so that you didn't crash the price. But this seller either didn't care about the price, or (something more evil), wanted the price to crash.
Since most futures trading is not based on ever taking physical delivery, but rather is all accomplished through a ‘cash’ transaction – we now have a different situation to consider. Given the sale of all that gold was most certainly accomplished without ever having to borrow the physical metal, the transaction would be called a “naked short". Because the gold market (in comparison to the currency market) is relatively thin in volume, the price fall was breathtaking. By flooding the system, and triggering a ton of self-defense selling algorithms, a buy back of gold could only really happen at the $1,440 level. On the 14 million ounces of gold transaction, someone lost over 1 Billion dollars. Not any single person or group of people could do that? But your friendly ‘Central Banker’ could.
A sale of 14 million ounces of gold has one intention – to drop the price as fast and as hard as possible. Why? In order to systematically slow consumer demand for the metal – while allowing global Central Banks (China, India and Russia) to buy more for less. As gold was hovering around $1,500 per ounce – all around the globe gold and silver (coins and bullion) were being purchased as fast as they were made. The U.S. Mint ran out of Silver Eagles on two separate occasions. Premiums (the difference between the spot price and the actual physical price) for physical gold were increasing. The very same people that were proclaiming gold going to $3,000 per ounce a week ago, on Friday were proclaiming gold being worth $800 per ounce. However, (this time) not everyone was a believer. Factually, last week the U.S. Mint set a record by selling 63,500 ounces of gold in a single day. I (like a lot of others) am looking at this price as a buying opportunity for the physical metal.
The Market...
My heart certainly goes out to all of those in and around the Boston community this week. Heading into Friday we had already seen the worst week of 2013, and the economic data and the earnings really weren't doing much to change all of that. For example, IBM missed their estimates ‘big time’, and their stock experienced its worst drop in a decade. A perfect example of why you never hold a stock over ‘earnings.’ For the most part, we sat on our hands this week. Unless you're a real pro, it's hard to go short in a market like this, because at any second The Ben Bernanke could announce even more stimulus. So, until the entire "up" trend is completely broken, we just sit on our hands instead of trying to go short.
Friday ended slightly green. The question however is not an easy one: "Is the selling over?" It’s hard to say because of the situation. The market’s averages still appear tired. The XLF (the ETF that measures the financial industry) finally got back above it’s 50-day moving average on Friday – but the Small-Cap ETF (IWM) and the Semiconductor ETF (WMH) still remain far below their respective 50-day moving averages. So the overall market is still slumped, but they have boosted the XLF to show some kind of strength. Will that strength continue? It feels like we have more downside to come before the next run up. With that in mind, I personally won't be rushing out to buy anything. I’m going to let them shake out all that needs to be shaken, and if the market wishes to push us back up and over the recent highs – we will certainly tag along. I’ll need to see that in order to believe it.
Tips:
I was stopped out of NUAN last week for a $1.50 profit, as well as SPY
for a $3 profit.
I’m watching ABT over 37.50, NKE
over 61.31, BIG over 36.00 and BMY over 41.50.
My current short-term holds are currently only in the precious
metals arena:
-
SIL – in at 24.51 (currently 13.98) – no stop
yet
-
GLD (ETF for Gold) – in at 158.28, (currently
135.50) – no stop ($1,395.00 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently
22.50) – no stop ($22.95 per physical ounce).
To
follow me on Twitter and get my daily thoughts and trades – my handle is:
taylorpamm.
Please
be safe out there!
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