Another Down Week For Gold

Chris Poindexter

12/10/2012 12:01:00 AM

 

Despite a strong finish on Friday, gold still ended down for the week.  The good news is it’s still higher over the last month. 

Gold ended trading Friday up $3.66 to $1,703.80 and silver was up $0.07 to $33.05 for a silver/gold ratio of 51.5. 

Like gold, silver was also down for the week but silver has outperformed gold on the 30 day scale.  Despite the inherent volatility in silver, it still is finding acceptance among investors and it tends to be an addicting investment class.  Silver stackers look at Silver Eagles in a display case with the same look most people reserve for puppies at the rescue center.  

There’s a lot of hand-wringing in the media this week around the price of gold and analysts are pointing to this and that as reasons gold is not doing better.  I’m still not clear on the value of looking for reasons after the market moves one direction or another and sometimes there just isn’t a good reason for markets to behave the way they do. 

Much of the analyst angst stems from the belief many investors cradle from long exposure to economic dogma that markets are somehow logical and that investors act in their own best self interest.  That might have been true back in the 50s but it certainly is not the modern reality in commodity or equity markets. 

The truth is markets are run by machines that do the bulk of the trading; machines that are only as logical as their programming.  The problem with hundreds and thousands of machines trying to skim a few pennies from one another is that the interplay of thousands of machines all operating independently regularly serves up trading scenarios that cannot be predicted. 

Layered on top of the barely regulated chaos of the Market By Machine are a few big traders with the ability to game the system.  These cloistered few have billions to move from this market to that, giving them the ability to depress prices one moment and capitalize when prices recover the next.  Actually, when I say “moment” I mean a few microseconds, if that. 

Big traders can cause momentary spikes in market trading by just putting in orders that end up being canceled before they’re even executed.  In a world of hyper-reactive machine trading those phantom orders can trigger selling or buying by thousands of automated trading systems, all trying to beat the competition by a few fractions of a second. 

So my challenge to my fellow market analysts is to explain, at the trading level, how any of that relates to the budget negotiations in Congress?  Certainly big events can move markets, but starting to think that markets are always logical and to look for meaning in the numbers is a trap. 

I would be the first one to admit that these same forces are acting on the gold and silver markets.  The prices of precious metals are influenced by a number of big players and trading houses.  So, how do you know then whether gold is fairly valued relative to currency?  You don’t.  No one does.  I doubt even Chairman Bernanke knows and he’s the guy with his thumb on the nation’s currency printing press. 

I’m not buying gold because I have some special insight on its value relative to currency.  I’m buying it because I know that, no matter what happens to the markets, the fraction of my wealth in precious metals will hold some relative value in whatever passes as currency at the time.

In a world of hyper-reactive machine trading, the gold in your safe is as close to a solid guarantee as anyone can get. 

Chris Poindexter, Senior Writer, National Gold Group, Inc