Sunday, September 25, 2011

WSJ: Market Rout Claims New Victims - Precious Metals (GLD) (SLV)

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I wrote late last week that the action in precious metals the past few days smelled of liquidations; the action was very similar to what we saw in 2008 when institutional money was selling what they were forced to, not necessarily what they wanted to.  Silver ended up losing almost 1/5th of its value Friday alone! The WSJ delves deeper into this topic, claiming European banks were also selling to help raise more capital:

  • Gold futures dropped 5.8% Friday, the biggest one-day loss in five years, as investors rushed to cash out of some of their most profitable investments in the hopes of making up for losses elsewhere. The decline capped gold's worst week since 1983
  • Silver was even harder hit, plunging 18% for its largest single-day decline since 1987.
  • Investors have grown increasingly skeptical of policy makers' ability to revive the global economy, and of their willingness to bring about a resolution to the European debt crisis.  The broader rout has left many investors with unexpected losses, driving some to part with some of their better performing investments, among them gold and silver.  
  • The declines are a turnabout for gold, in particular, which has recently found strong demand in good times and bad. It has enjoyed a special status as a safe haven from financial crisis and political turmoil, as well as a hedge against inflation.  Gold has risen six-fold in the past decade, including a 15% gain this year..
  • Some hedge funds were selling to raise cash to meet margin calls from lenders. Other investors were using proceeds of silver and gold sales to replenish other parts of their portfolios, which had fallen in value in recent sessions, said George Gero, precious metals strategist at RBC Global Futures.
  • In addition, it appeared that European banks were selling gold, possibly in order to raise cash and shore up their balance sheets, Mr. Gero said. This selling was then magnified by so-called momentum traders whose strategy is to piggyback on moves up or down in price.  
  • Silver faces the added woe of being widely used in industry, and therefore vulnerable to fears that weak economies will consume less. Moreover, the Shanghai Gold Exchange said Friday that it will expand the upper and lower trading limits for its silver contract.
  • The fact that gold is falling along with other assets complicates life for those who bought gold because they thought it would rise or fall independently.  "There is nowhere really to hide at the moment," said Fredrik Nerbrand, global head of asset allocation at HSBC.  (well technically that's incorrect - U.S. Treasuries have been having a ball)
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The NYT also chimes in with - A Gold Rush Wanes as Hedge Funds Sell
  • Some traders said that hedge funds were beginning to unwind, or close out, what has been a very popular and profitable trade for the last 18 months as they bet the dollar would fall and that gold would rise. In the last month alone, the euro has fallen nearly 4 percent against the dollar amid worries about the European debt crisis. 
  • Other market participants said hedge funds were selling their positions in gold to raise cash to meet increased capital demands for their borrowings from Wall Street banks as the assets they have put up as collateral, like other commodities or stocks, have declined sharply in value
  • Others say some hedge funds may be selling to meet redemption requests from investors who have been spooked by the recent market volatility and fear a repeat of the problems of late 2008. “The tendency for individual hedge funds or anybody is to sell winners before they sell losers. What’s been one of the few winners this year? It’s been gold,” Mr. Gayed added.

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