With Europe in Crisis, Why is Gold Down?
Gold bulls expect that as a crisis emerges, gold will respond immediately. Usually it does not. Why?
With Europe in Crisis, Why is Gold Down?
Gold bulls expect that as a crisis emerges, gold will respond immediately. Usually it does not. Why?
Of course, many still believe that the EU and Greece will arrive at a deal that kicks the can down the road once again, and they may. But regardless of the outcome, gold usually responds to crisis with a delay, as it did in 2008, because of its special place in the world of collateral.
In a crisis, market players have to put up more high quality collateral to meet the requirements of lenders and the terms of their derivatives contracts etc. The one thing that is always in short supply in a crisis is grade A collateral. And the one thing that is always accepted, anywhere in the world, is physical gold.
Collateral is now in short supply and liquidity is scarce. We understand that these conditions existed in the market even before the current heightened levels of anxiety. We believe that players are now pledging gold as collateral which is then immediately hedged by those holding it, to lock in their protection in dollars. When these transactions have cleared, gold should have its move, just as it did in 2008. Hedges will then be unwound in stages, adding to the move.
No one knows for sure what is happening in the gold market, which remains rather opaque, but that's one reason we think gold is not yet acting the way many think it should.