Biggest Problem For Gold And Silver: Doomsday Never Comes

By Nigam Arora

The number-one problem for gold and silver investors is that the world does not end very often.

You must understand that unlike stocks, bonds and forex markets, gold and silver markets are not very deep.  In plain English, this means that typically at any one time there are not enough buyers and sellers ready to step in with a large size without a big change in price.  This is typically not the case with large cap stocks, Treasury bonds and major currencies.

The price of gold and silver is moved by the marginal buyers and sellers at the fringe.

Traditional wisdom is that gold and silver are a hedge against global instability and inflation. Traditional wisdom is usually correct over a very long period of time, but not always right in the short term.

Lately, gold and silver have been in the hands of mom-and-pop momentum investors who buy on good news and sell on bad news.

At The Arora Report, our computers monitor trading data from gold and silver related instruments from all over the world.  This includes futures, ETFs such as SPDR Gold Trust (GLD) and iShares Silver Trust (SLV), and gold miner Market Vectors Gold Miners ETF (GDX), as well as mining stocks such as Barrick Gold (ABX), Newmont Mining (NEM), Silver Wheaton (SLW), Coeur d’Alene Mines (CDE), Pan American Silver (PAAS), Agnico-Eagle Mines (AEM), and Goldcorp (GG).

I have designed algorithms that dissect the trading data along with a variety of other indicators to make a qualitative estimate of buying by institutions and by smaller investors.  These data show that in gold’s run from $1450 to $1910, 70% of the buying was by retail investors.  Only 7% of the buying was from institutions.

In the subsequent run from $1600 to $1760, 85% of the buying was by momentum chasing retail investors, but the ‘smart money’ was a net seller. In the latest run up, 92% of the buying between $1500 and $1790 is from mom and pop.  Institutions are again net sellers.

Fundamentals may be on the side of the institutions. The hard data on inflation shows that it is under control and the world economy has many deflationary tendencies.

What about all the money that central banks are printing?  Monetarists like Milton Friedman was correct that inflation is at its core a monetary phenomenon, but inflation has two sides: supply and demand.  Metaphorically speaking, the printing presses at central banks have been providing plenty of money supply, but the pull from demand is not there.

This phenomenon is like pushing on one end of the string with no one pulling on the other end.  There is a legitimate question as to what will happen to all this money supply over a long period of time.

It was not long ago in 1971 that gold was at $35.   Even if the price of gold cools to a more reasonable $1400, that still represents a move of  3,900% over a relatively short period of time in the context of the continuum of world history.
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One Response to Biggest Problem For Gold And Silver: Doomsday Never Comes

  1. Dugutigui says:

    As a gold miner I find this article very interesting… 🙂 Probably you are right… hope you are not 🙂

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