Between one Friday and the following Monday in mid-April, the gold spot price plummeted from over $1600 per ounce to a paltry $1323 – a drop of more than 15 percent in less than two trading sessions. Since that time, gold has climbed as high as $1500 per ounce and is now sitting at a respectable $1444 per ounce after gaining $8.60 this morning. So, gold dropped more than 15 percent in April and since that time has risen as much as 11 percent. Why is the gold price acting so bipolar?
The answer lies in the volume of each type of gold investment that gets bought and sold each trading day. Institutional investors such as George Soros, John Paulson with his Gold Fund and others have purchased large amounts of paper-based gold in the past. When these large positions get liquidated, it puts a dent in the gold market. Futures contracts, pool accounts, mining stocks and exchange traded funds (ETFs) are all part of this gold derivatives market.
Your average Joe Investor has no interest in making a quick buck by studying technical charts all day. He has a job, a family and one or two properties to concern himself with, so there is no time for hair pulling or dancing every time gold goes up or down. Mr. Investor just wants some gold and silver around as an insurance plan in case things go south for the U.S. economy.
So, after technical factors created a massive sell-off of institutional investors in mid-April, household investors saw a golden opportunity and a way to save $200 per ounce from what they were previously prepared to pay. Thus, gold’s huge drop was countered almost immediately by the large volume of physical gold investing that took place once gold hit its bottom. Look for this trend to continue as banks get more profit-hungry and smaller investors get more safety-conscious.