I guess the major market event this week has been gold's 'flash crash,' which started last Friday and continued on Monday, taking the metal down by $200 over these two days. So, why did this happen and what to do now? If you have some gold holdings, (as I do, but squirrelled away in my pension plan, thank goodness), you must be quivering a little.
The explanations for these types of market moves can often be elusive, enigmatic and often characterised by triggers which in the cold light of day don't seem to be particularly rationally causally connected to the observed outcome.
By any measure, this was a tired, decade-long, bull market, with many late, 'weak' longs-maybe the latest and weakest were those who bought after the BOJ QE announcement. More of this later. During the course of last week, two events-first of all stories that the Cypriot government was going to raise €400m by selling gold and secondly a hawkish interpretation of the minutes of the previous US Fed's meeting-started people edging towards the exit; despite the relatively small amount of the putative Cypriot sales and the undoubted commitment to dovish policies which the Fed's ruling elite continues to espouse at every opportunity.
The serried ranks of inexperienced, naïve ETF investors began to liquidate, but the real warning signals had started to flash in the previous weeks and months. It was very suggestive that gold failed to rally, either on the horribly inconclusive Italian elections, or as the Cypriot crisis unfolded; the possible solutions to both of which, and to the wider Eurozone crisis, will inevitably involve more money printing. Neither did gold perk up on a large decline in US real rates nor, and perhaps most tellingly, on the ENORMOUS quantitative easing announced by the BOJ.
These failures on the part of markets to react in the expected fashion to news are THE most valuable of market indicators, as far as I'm concerned. They give the clearest possible indication of market positioning.
Of course, as a crash gathers momentum, the margin call effect propels it downwards with a self-fulfilling, self-perpetuating brutality-many positions would be automatically liquidated by brokers' computer systems when their owners' margin became exhausted-the hapless investor has no say in the matter.
As an aside other metals, oil, petroleum products and soft commodities have either been 'caught in gold's downdraft' or are also suffering from tired rallies-this should have a silver-lining effect, as it will reduce real costs for industry and consumers.
Another very plausible theory is that investors feel that the enormous Japanese QE may relieve the pressure on the Fed to keep monetary conditions easier for longer, leading to a more rapid tapering off of the Fed's QE, and in turn to higher US yields and a higher dollar in a world where all the major currencies' interest rates are not going to rise anytime soon and of course gold has no yield. It seems the BOJ's QE may also have inspired locals to become bullish on the prospects for domestic investments, such as equities, leading them to liquidate holdings in other assets, such as gold, to bring money home.
Among these people many have been 'late' gold longs; yield-starved retail Japanese investors who only recently became convinced, after the BOJ's actions, that gold must surely appreciate, and that inflation was surely now going to undermine the value of their massive Japanese Government Bond holdings.
So there you have it, a number of plausible explanations, which all probably played some part, but is this the end of gold's bull run? NO! As I pointed out in my Huffington Post blog last week,
QE is now on steroids and being administered with an enthusiasm that would have been appropriate four years ago, but which is now over the top; inflation is coming, and gold will have another day in the sun. 'Buy when there's blood on the streets'!