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More buying leads to lower prices?
Thursday, August 23, 2007
Is this the way markets are supposed to work? The more gold that the gold ETF buys on the open market, the lower the price goes? Strange.
Maybe they should start selling the stuff and see if the price goes up.
6 comments:
If you want gold to go up, stop buying paper gold in the ETF. Buy physical gold and take delivery.
So that means that as long as they maintain a 1-1 reserve, net longs can buy without pushing the price up? Outstanding! :)
I'm an econ student, and have been following GLD's inventory (they were selling earlier this year, now record level buying).
A few things that may be related:
1. Fallout from a credit crunch could cause this, but wouldn't an economic slowdown curb inflation?
2. Global inflation has been bad and demand for hard assets, panic for gold (duh, but who knows how bad it will get...)
3. Is the period of increased inflation over or is it just beginning? And how will the fed respond to all this...?
4. (the bad one) Perhaps asset managers are liquidating more gold for cash to meet margin calls, hence the huge drop in commodities prices late last week. And maybe the ETF is buying it up....?
Alot of the hedge fund or quant managers on wall street don't like gold bugs or even commodities traders. They view a high price and volume of trading in gold as a very bad sign. Maybe now they are trying to keep it down by selling their inventories...? Also, a spike in gold would cause even more panic about the credit crisis, right?
This isn't so hard to understand - stop trying to make a macro-economic issue out of it.
If the holders of GLD are less willing sellers than the holders of gold futures contracts, the price of gold goes down faster than the price of GLD. Hence the distributors have an arbitrage opportunity to buy real gold and sell newly created shares of GLD. They will do so until the prices line up again and no further arbitrage opportunity exists.
I interpret the chart as there was a boatload of selling by other market particpants, probably to meet margin calls/redemptions/etc.
The price of gold (and other commodities held by speculators, such as oil) will go down in the short run as part of the broad liquidation of risky assets. After that runs its course, then the price will start to increase, particularly as concern about holding fiat currencies becomes more dominant.
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