I DON’T KNOW ABOUT YOU, BUT I CAN HEAR SHIRLEY BASSEY BELTING ONE OUT AS I WRITE THIS POST

11/10/11

Gold was off yesterday, albeit only a touch, on a day when, by most conventional reckonings, it should have been skyrocketing; the news out of Italy was bad, the news out of Greece wasn’t any, if at all, better, and the equity markets were in full retreat, with the S&P down 3.67%. It would have seemed that yesterday was the perfect day to be long gold.

While looking for answers regarding the movement of any commodity, stock, etc. on a given day is pointless given the randomness of any given investment’s movements on any given day, gold’s counterintuitive action yesterday got me to musing. What if gold were to continue to trade down even if the news coming out of Europe, and points east, west, and south, were to continues to be bad but gold were to continue to trade down. What could cause such a phenomenon? Note that I am not predicting such action for gold; indeed, my holdings in GLD and kindred investments remains vastly outsized. But with a position this large in a metal so vital to reading the markets, a little musing is advisable, indeed necessary.

The obvious explanations for weakening gold in the face of circumstances that would dictate a strong market for the ancient object of kingly desire might hold in such a circumstance. The first is increasing margin requirements for gold futures contracts; indeed, it was such an increase in margin requirements that caused gold to drop in the late summer and early fall before plateauing and then resuming a slow climb the last few weeks. The second such explanation is the old investing truism that nothing climbs to the sky; gold has roughly doubled over the last three years, so it’s not surprising that it might be hesitant to continue trading up aggressively, even when it seems like it should. A third is that hedge funds and other investors sell what they can when they can’t sell what they’d like. While this is a popular theory with a degree of credence, one wonders how far it goes; for example, if people sell what they can when the defecatory product hits the wind motivation device, why don’t they liquidate their treasury positions? It would have been easy to unload those positions on a day like yesterday!

But what if there could be more at work, either now or in the future? What if people, after buying, even hording, gold in anticipation of hard times are now liquidating those gold positions, or hoards, now that hard times, at least in the eyes of a sufficient number of those hoarders, have arrived? Could it be that gold could strengthen in the run-up to hard times and then fall when those hard times commence in response to liquidation of the stockpiles of those who bought gold as insurance against the evils that have now befallen them? In other words, could things get so bad that gold starts to weaken because people have to sell it? I’m not talking about hedge funds or professional investors here; I’m talking about investors, largely individuals, who buy gold for protection. One might call them gold bugs, but that description seems somehow incomplete or insufficiently inclusive.

Again, I’m not predicting gold’s demise, but, as a holder of gold in one form or another, I think I am duty bound to think about things that might cause gold to weaken. And, as my readers know, I like to think creatively. (If I were given to the triteness that permeates modern discourse, especially modern business discourse, I would say that I like to think “outside the box,” but I am not given to such mewing drivel, so I say that I like to think creatively. But that is grist for another mill, an upcoming mill that I have been planning for awhile, and a reason to close this post, awkwardly, parenthetically.)