Many people in the markets are looking at the looming questions behind the possible defaults surrounding Greece, Portugal, & Ireland.
On August 24, the CME raised gold margins, a step that’s proved difficult for silver to handle only a few months earlier, but there was more to gold’s decline. The reasoning and warning provided in the August 24 ETF Profit Strategy update is about as basic and common sense as it gets: ‘Even though gold is the logical fear trade, price action is also dictated by liquidity. At some point investors will have to sell holdings to pay off debt or answer margin calls. Commonly the most profitable asset is sold first. Gold has been the best performing asset for a decade and a liquidity crunch could produce sellers en masse.
Those losses had to be paid somehow. It’s human nature to sell off the most profitable asset class to cover losses. That’s when sales orders for gold and silver piled up.
All asset classes – even mighty gold and silver – are subject to liquidity and liquidity crunches.
Anyone holding gold and silver most likely had a heartattack this morning. Following an impressive surge in both metals, which saw silver soar from $26 all the way back to $30, after it was made clear that there was no behind the scenes liquidation of the metal but merely more piggybacked margin hikes this time out of China. Another factor that helped was Marc Faber’s appearance on CNBC earlier, who said that gold is now “quite oversold” and that he would be adding to the yellow metal in the “next two days.” In retrospect, he should have been adding today to his existing holdings. However, since he already has 25% in gold, he is forgiven.
Some of the key soundbites from Faber: “Gold is quite oversold and I would consider buying some gold in the next two days… We overshot on the upside when we went over $1,900. We’re now close to bottoming at $1,500, and if that doesn’t hold it could bottom to between $1,100-$1,200. “Both equity markets and gold markets have become very oversold, and I think a rebound is occurring. Following this rebound, which I expect to get underway this week, there will be a longer slowdown.”