By Bud Conrad, Chief Economist
How can we explain gold dropping into the $1,300 level in less than a week?
Here are some of the factors:
- George Soros cut his fund holdings in the biggest gold ETF by 55% in the fourth quarter of 2012.
- He was not alone: the gold holdings of GLD have contracted all year, down about 12.2% at present.
- On April 9, the FOMC minutes were leaked a day early and revealed that some members were discussing slowing the Fed $85 billion per month buying of Treasuries and MBS. If the money stimulus might not last as long as thought before, the "printing" may not cause as much dollar debasement.
- On April 10, Goldman Sachs warned that gold could go lower and lowered its target price. It even recommended getting out of gold.
- COT Reports showed a decrease in the bullishness of large speculators this year (much more on this technical point below).
- The lackluster price movement since September 2011 fatigued some speculators and trend followers.
- Cyprus was rumored to need to sell some 400 million euros' worth of its gold to cover its bank bailouts. While small at only about 350,000 ounces, there was a fear that other weak European countries with too much debt and sizable gold holdings could be forced into the same action. Cyprus officials have denied the sale, so the question is still in debate, even though the market has already moved. Doug Casey believes that if weak European countries were forced to sell, the gold would mostly be absorbed by China and other sovereign Asian buyers, rather than flood the physical markets.
My opinion, looking at the list of items above, is that they are not big enough by themselves to have created such a large disruption in the gold market. Continue reading "Physical Gold vs. Paper Gold: The Ultimate Disconnect"