Gold Volatility

Aug 17, 2011 at 11:52 AM

By Anthony Ardizzone

Gold Live Chart

After checking Monex once again today, I noticed that gold has dropped $53 and has lost its coveted summit as most expensive (per ounce) popularly-traded precious metal. The current ratio of gold to platinum is now (rounded to the nearest thousandth) 0.978 to 1. But why did gold all of a sudden drop so rapidly in price?

Whatever one's assumptions, we can say that confidence in our government is not one of them. After Standard & Poor's downgrading of the United States' credit rating last week, Wall Street and the New York Stock Exchange has seen historic lows in stock prices and market uncertainty. In this environment, people would normally turn to gold as a safe-haven asset for their portfolios, thus pushing up the price. However, this doesn't appear promising given the high price of gold. It was exactly this kind of demand for gold that pushed it above platinum in the first place earlier this week.

Rather, what we are seeing is the phenomenon of selling gold in exchange for paper dollars. In this bad economy, people have debts to pay off and prices are wildly fluctuating throughout the market. Given that it is difficult to transact in gold (since it is not legal tender), investors sell their gold for dollars in order to meet their financial obligations. In this case, there would be more seller than buyers. As a result, this market situation tends to push the price of gold down.

We might continue to see the rapid fluctuation of precious metals prices in the next few months. It is imperative that people watch these prices. The continued increase in prices since the beginning of the last decade should cause everyone concern about the state of our economy when government gets involved. Don't let that idea mask the perception that government involvement in the marketplace lowers prices. The market does what it can to correct the mistakes made by the government, but it is the government which is fundamentally at fault.

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Google Andrew Maguire Silver and consider the financial strength (in terms of dollars) of the "friends of the Fed". I have run this scenario through my head several times:

I know precious metals will go up in price. I could make a killing selling very long term puts on precious metal ETFs. Or could I? Suppose I leverage myself 50 to 1 selling long term puts, so I get $500,000 with $10,000 available to buy (assuming the let me). I will be obligated to buy, say $5,000,000 worth of metal if the price stays down. But if the amount of metal I'll be expected to buy is worth $50,000,000, the $500,000 I made will buy me a new lawn mower. I can buy 50 new lawn mowers for my $10,000 today. Hyperinflation is a bitch.

The answer is to start writing contracts in GOLD - but of course they're unenforceable because of legal tender laws. Did you know that there's a law against creating chunks of metal for the purpose of easing trade and stabilizing your prices (because that would be "coining money")? The rationale is that if people were permitted to do that, too many would be tricked into accepting coins with a face value higher than their instrinsic metal value. As if greenbacks are any better! Ha! Caveat Emptor is even more important when the government pretends to be protecting you.

Submitted by Dave Scotese on August 18, 2011.

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