Simit Patel

Well the market bottom that many, myself included, had been expecting got a rude dose of reality as the DJIA, Nasdaq, and S&P 500 all suffered big drops. Gold dropped $0.50 as well, while silver dropped by 6.48%.

Precious metals have traditionally been viewed as safe havens, and given the turbulence of financial markets of late, one would expect safe havens to be in demand. So what's going on here?

Well, first we should note that gold IS rallying -- if you're looking to buy physical gold, rather than trade gold futures. There is a disconnect in the physical market with respect to the futures markets, with demand for physical gold creating shortages at many gold dealers.

So if demand for physical gold is so high, what's causing gold prices on exchanges to be relatively stagnant? A few issues:

1. Naked short selling. Naked short selling refers to the practice of short selling an asset one does not own. There are indications of this being done in the gold market, which naturally results in a depressed price.
2. Margin call liquidation. The credit crunch has many financial firms liquidating their precious metals to pay off debts and other financial obligations, which includes a sell off of gold. As many of these obligations are priced in US dollars, this is why we've seen a bit of dollar strengthening of late. This supports those who argue deflation is a greater economic concern.

So where do we go from here?

I suppose it returns to whether you view inflation or deflation as the bigger concern over the next few years. Inflationists (weak paper currency) will want to use this as a gold buying opportunity; deflationists will want to be stocking up on their respective currency. Traders will want to note major support at $750 USD, with resistance at the significant psychological barrier of $1,000 USD.

Disclosure: I'm long gold.

djfite

Simit,
I'm glad you brought this up. I just went down to my local coin shop to talk to him about this very subject. Man, did that guy have some opinions about the current economic climate. He also refered me to Gold Anti-Trust Action Committee | Exposing the long-term manipulation of the gold market. A site full of gold lovers claiming that the FED is artifically holding down the price of gold to give the impression that the dollar is stronger than it really is. Anyway, the cheapest coin he would sell me was $56.00 above the spot price. The next cheapest was $74.00 above spot. He affirmed too that there is a shortage of actual gold for shops like his and that the mints are backed up.
It seems that someday the pressure would have to release off the price in the market and it would take off.
Is there a record of volume on the trading of gold, or just what is there for GLD?
Thanks.