Tuesday, June 13, 2006


Precious Metals 'Hot Money' Head For The Exits

Some reports on the wild sell-off for precious metals. "Gold and other metals suffered their biggest meltdown since the early 1990s Tuesday, as concerns over the impact of rising interest rates on global growth continued to rock speculative markets."

"'We are witnessing another great transfer of wealth in progress, and the process has just begun,' writes Jack Chan, trader and founder of Traderscorporation.com. 'We can debate over China, India and a whole lot of reasons why metals should go to the moon sooner or later, but the fact is, a lot of hot money was required to propel these markets to the current great heights.'"

"Gold for August delivery plunged $44.50, or 7.28%, to close at $566.90 an ounce. It was the worst single-day percentage decline for gold since January 1991, according to brokerage Miller Tabak."

"The selloff was even more pronounced for silver, with the July contract losing $1.44, or 13%, to $9.62 an ounce."

"'Gold now stands at a point where the $300 move it had achieved over the past year has been reversed by 50%, and questions are being raised about its ability to sustain much more damage before the bull cycle is declared as being on a permanent summer vacation,' said Jon Nadler, at bullion dealers Kitco.com."

"'Gold will have to await (patiently) the return, in earnest, of its formerly loyal physical buyers before one can declare this correction over and not start calling it a bear market,' said Nadler, adding that he sees no signs yet that this reversal of sentiment has taken hold."

"Despite the severe losses Tuesday, Peter Grandich said he believes 'the current correction is going to end up [as] the last great buying opportunity in what ... remains the greatest secular bull market in gold's history.' He points out that the risk in gold prices is $25-$50 lower, while the reward is $200-$500 to the upside."

"The plummeting silver price has 'nothing to do with a bubble or related driver,' according to Paul Mladjenovic, a silver analyst at PM Financial Services. 'There are some very large traders [who are] massively shorting silver, causing an artificial plunge in the silver price,' he said, adding that 'the situation is great need of scrutiny and enforcement by the CFTC [Commodity Futures Trading Commission].'"

"Palladium was also a big decliner, with its September contract down $39.05, or 12.4%, to end at $276.70 an ounce. It touched $274.10 earlier, its lowest level since January. Sister metal platinum saw its July contract fall $52.90, or 4.5%, to close at $1,118.50 an ounce after a seven-week low of $1,117.50."

"Stop-loss selling hammered gold after the market retreated below first $600 and then $590, which were recent trend-line support levels, said trading sources. 'It was all margin selling and liquidation by the funds,' said George Gero, VP at RBC Capital Markets Global Futures. 'No buyers appeared until the market was $40 down.'"

"'Fund dealer and investors liquidation' intensified after the New York open, said James Moore, analyst with TheBullionDesk. Gold 'needs to stabilize in order to renew investor confidence in the market or else run the risk of free-fall back to the $500 to $480 area,' he said."

"'We believe that investors are showing signs that they are most concerned about over-aggressive central bank rate hikes triggering a growth slowdown," said UBS analyst John Reade in a daily note. 'Fears of a growth shock has knocked equities, emerging markets and commodities, including gold ... With a heavy data and comment calendar out of the U.S. this week, we expect further volatility and likely further near term declines in precious and base metals prices,' Reade said."

"The dollar hit new one-month highs against the euro and yen Tuesday. Gold has a tight inverse relationship with the U.S. currency as investors often use the metal as a dollar alternative."

"Oil fell sharply, echoing similar moves across commodities and stocks. The fact that Tropical Storm Alberto, the first of the U.S. hurricane season, was forecast to miss oil and gas infrastructure, also pressured prices."

The trader Chan is right. A market needs people that want to own the subject matter. This sell-off looks like hedge funds and the like bailing on speculative positions. The comment about no buyers until $40 bucks down was interesting.

Gold futures blew through the 100 day moving average today. Grandich apparently thinks the next support is $25-50 lower. Those are the levels to watch.

As for silver being manipulated, I don't know. I was holding silver and gold when it did this 15 years ago, so it isn't anything new. Tomorrow should be interesting.
this bull market is trying to take nobody with it!
What was that Buffett quote? Oh, yeah...

"In the short term the market is a popularity contest; in the long term it is a weighing machine."

Looks like we're not that popular.

Of course, John in VA probably thinks the tide's gone out and we're all swimming naked! ;-)
Ben, As to silver manipulation.I have long believed that any market that can be ,will be. It's true of just about any business or industry you look at. Does the housing market ring a bell? Prue market manipulation with some help from "big" hands. It's human nature. The "hot money" can head for the exits, that's what "they" do. Short term players never look at long term pictures.
This is slightly OT, but its a good take on the current markets nonetheless (from Bloomberg today).


John in VA,

You have license to gloat, if you will. Although I'm still above water overall, this correction's a doozy and more than I would've expected. Guess you can never underestimate mob mentality (in all it's glorious stupidity) and the firepower of CBs.

Not in my nature, tj. And even if it were, gloating would be premature. I really don't know where gold is headed next. I believe we're still in a commodities bubble and the only prediction I would venture to make at this point is that we'll continue to see extreme volatility.
Okay, everyone...

At what point do fundamentals start to reassert themselves?

When does the plunge on Wall Street start to shake people's faith in the U.S. economy?

When does the carnage in global markets start to shake people's faith in foreign investment?

What the heck is the smart money supposed to be invested in when equities, assets & commodities are tanking -and- inflation is ravaging dollars & bonds?

p.s.: I still have trouble with the idea that hedgies were big into PMs. Given the money they can swing, I'd have expected a higher upside. The Bass brothers nearly cornered the silver market all by themselves, and they don't have near the juice of your typical leveraged hedge fund.
Correction: ...they didn't...

Don't have a clue if they do or do not now! ;-)

When does the plunge on Wall Street start to shake people's faith in the U.S. economy?

I don't think it happens until the housing crash becomes the accepted reality. I know we harp on this a lot, especially with the HB connection, but I believe a _lot_ of people are still thinking "my house, my house" will carry them through. Upwards of 70% of the US owns property now if the numbers are correct. Making matters worse, I would wager that a large portion of the renting community are living paycheck-to-paycheck so until that is threatened they could care less.

Anecdotally speaking I have friends who bought their first house in 2003 for 240K and are currently trying to unload it for 375K right now. It hasn't budged in 60+ days, and they are confident that the market is just returning to "normal" (which of course means plateauing). I know that (despite my best effort) the value of their house declining below 300K (let alone what they payed for it in 2003) has not even entered their mind at this point.

I believe that when all the people who bought homes (or HELOC'd) in the last 3 years become aware that they are underwater, it will be the catalyst for all the factors that will result in the lack of faith for which you're looking.
"We've seen a lot of panic selling by people who have gotten into emerging markets and commodities later in the game"

goodbye weak hands.
Yeah, bye-bye, weak hands. Today gave me an opportunity to buy silver at prices I'd thought I would never see again. I hope it stays down this way for a while so I can buy more in the coming months.

Pretty crazy spot chart today. I actually printed it out and will save it to look back on no doubt. Never in my 17+ years of playing with gold have I seen anything like.

PS- If the Feds raise the rate .50 bps the gold-bugs are going to be effed. I doubt it.....1/4 point is already priced in so we "should" be looking good from here on out..
Gold is going to 200dma Like I thought so. And I think it will be flirting with 200dma for months.
I myself don't care about any events like: interest rate or shake up in the economy. I don't think it will have any intermediate effect on price of gold. At this point technicals overcome any fundamentals. This up leg started roughly 8 months ago and now it has to rest for many months (possibly 6-8).
Buying now is not a bad thing, but
I rather wait until POG goes below 200ma.
What a difference a month makes. Remember the stories about pension funds buying gold, and Russian stealth buying? The media is a wonderful propaganda tool; you can spin a story any way you want. Goodbye, weak hands. See you next time (probably as soon as the Fed takes its foot off the brake).
Gold bugs are taking a full, five finger anal fisting. Not to worry, though, it should come in for a nice soft landing at about 450 and ride there for another 20 years or so.
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