Volatility in Markets: Bad Sign for the Gold Price?
Source: Julian D. W. Phillips, Gold/Silver Forecaster (12/18/09)
A 5% correction in one day, is this reasonable?. . .Actually, gold's reputation as a volatile market [when others are stable] is misplaced.
Gold, Is It Inherently Volatile?
A 5% correction in one day, is this reasonable? That happened to gold and many would say was consistent with its reputation as a volatile market. But at the same time most markets reflected the same volatility and have recently been doing so regularly. Actually, gold's reputation as a volatile market [when others are stable] is misplaced.
When gold rises in price it is because uncertainty and instability lie ahead or lie all around. Then all markets are volatile. It would be better for investors to accept this and to accept that gold under these conditions rises in price, as we have seen in the over 300% [nearly 400%] rise in the gold price this decade. Volatility in other markets has usually led to a fall in their value and even now most markets are struggling to regain pre-instability levels. So it is a great thing for gold to go volatile, because it means that economic and financial conditions favor the metal.
Where Does the Volatility Come from?
Volatility in basic terms comes when a seller or buyer is large enough to move a market by overwhelming buyers or sellers with their transaction. It may be that most buyers or sellers are acting emotionally and all facing one way so that all are sellers or all are buyers at that moment. Then volatility comes from markets being uncertain and both buyers and sellers rushing to follow others no matter. So when the gold price rises through resistance and soars, all become buyers, then the next logical step is for a cautious trader to take profits, triggering stops and sell orders that make the market go one way. When big buyers enter the market, they do not trade those amounts but hold and go quiet. So once they have bought and the gold price rockets, traders often come into take the price down to where new or old buyers re-enter the market again. This is what we are seeing on the $, on gold and on many equity markets. It makes for volatile markets full of uncertainty.
On one day the market is positive and one way, then a piece of news comes to fan the market, making buyers hesitate and sellers act, just as it did when the unemployment figures came out last week. Then a positive piece of news turns the market completely, such as an IMF sale of gold to India and the market goes one way again.
What is most pernicious is when the future is so uncertain that news both positive and negative has a disproportionate impact, as in the times of panic and fear, where reason flies out of the window and people just run in the direction of others. We are seeing this more and more frequently as we get used to bad news and surprises.
For gold there could be a dramatic piece of news from the short sellers in the gold market, a place occupied by just a few major banks. If the price were to continue to rise, their position would become untenable and they be forced to close their positions by buying gold. You can be sure that if this happens, there won't be enough gold to cover their short positions, so the price must rise to bring scrap to the market. In a market like gold at the moment this would send the gold price up a hundred dollars or more. But then again as we have seen, big buyers standing back leaves the market to traders, who fixated with the exchange rate of the $: € are taking the gold price down in line with the fall of the €, despite an remarkable fundamental scene.
Volatility Here to Stay?
Once the future of money and the global economy clouds and fear rises, volatility rises as a symptom of that fear. Instead of these fears being containable, they are structural and have the potential of moving markets substantially. Spreads [the price between buying and selling] widen as dealers become fearful of large price moves and it becomes more difficult to deal. This exacerbates volatility. As dealers face the dangers that lie ahead, they promote volatility so as to minimize their losses and maximize profits. So volatility becomes symptomatic of the likelihood of more bad news or good news. As volatility is a two-way street any news that calms or reassures the market acts disproportionately and sends prices soaring.
When we look ahead to the dark future for the global currency and monetary systems, reflecting the shift in economic power from West to East, we are certain that we will experience disturbing shocks on the way. In turn these favor gold as investors rush to it. The arrival of an OPEC currency that could be used as a petro-currency is a structural change, yet to be absorbed by the markets. Just that alone takes this world down to a new lower plateau of uncertainty.
We see many parallels between now and 1933. Just as the future from 1933 was often lightened by hopeful forecasters, we expect many to work from a base that normality will return and growth and faith will repair all the damage. This may comfort many, but is not pragmatic or realistic. Until global monetary authorities work in concert and repair the fundamental problems of the system, worse must come. But denial will kick in and nothing will be done until a crisis is on us again. Politicians reap more kudos and have more power in a crisis than in just simply a problem. So volatility must remain.
Present Purpose of Volatility
In the gold market at present there are buyers who would like to buy large tonnages of gold, but the ‘open market' may not be supplying such quantities. So there is a need to flush out holders who will under some circumstances sell gold. A volatile price helps, as does a price that is high, too high for traditional demand to enter the market as buyers. Such conditions can be made to persist and are being made so now. To get large amounts from this market, such conditions must stay for a long time. This is a large part of what is happening now, we believe. Don't be fooled by the $ rally!
Impact on the Gold Price Long-Term & Short-Term
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