Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
The past week has to be one of the most volatile yet surprising, both up and down, in a while for gold – so where is the gold price headed next?
On Black Friday, gold took a beating to become one of the best "sale items" on offer, as it hit $1,055.90 per ounce and the U.S. Dollar Index (USDX) closed above the 100 mark.
Then by Monday, Nov. 30, gold had risen to close at $1,064.50 in New York trading on a stronger dollar. On Dec. 1, it was mostly unchanged, bouncing between $1,065 and $1,070.
But the real action for gold prices lay ahead…
What Is Happening to the Gold Price Now
By Wednesday, Dec. 2, gold began to sell off around 8 a.m., dropping from $1,067 to $1,055 by 10 a.m.
The most likely culprit was the strength in the U.S. dollar. That same day, the USDX (or DXY) traded all the way up to 100.51 intraday, which put pressure squarely on the gold price.
Here's how the DXY looked over the past five trading days:
But that wasn't the only source of pressure. Sentiment worked surreptitiously in the background to weigh even heavier on gold.
That same day saw the SPDR Gold Trust ETF (NYSE Arca: GLD) experience an outflow of 2.4% in the number tonnes of gold held by the trust. A large single-day sell-off of this magnitude points towards capitulation.
Interestingly, there was a notable divergence between gold and gold stocks.
While the gold price was hitting a new low, the HUI Gold Bugs Index had managed to stay 5% above its own lows. According to Sentimentrader.com, this has happened three other times since 1996.
And get this – each of those times, the HUI gold stocks index averaged gains of 20% over the next three months.
So based on the HUI's behavior in the same circumstances over last 20 years, we could be in for a healthy run-up in gold stocks starting now.
Then came Thursday, Dec. 3…
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
"That same day saw the SPDR Gold Trust ETF (NYSE Arca: GLD) experience an outflow of 2.4% in the number tonnes of gold held by the trust."
How reliable are GLD's holding reports? GLD does not give retail investors the right to redeem for any of its mystery physical gold holdings. This fact alone ensures the GLD shares to be nothing more than paper at the end of the day. GLD also has a glaring audit loophole in their prospectus that states they have no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this backdoor to the fund. Some other red flags I've verified and welcome everyone else to do the same:
"Did anyone try calling the GLD hotline at (866) 320 4053 in search of numerical details on GLD's insurance? The prospectus vaguely states "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." When I asked about how much of the gold was insured, the representative proceeded act as if he didn't know and said they were just the "marketing agent" for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.
I remember there was a well documented visit by CNBC's Bob Pisani to GLD's gold vault. This visit was organized by GLD's management to prove the existence of GLD's gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this "GLD" bar was actually owned by ETF Securities."
GLD is really sketchy. Just read the part in GLD's prospectus where the custodian subcontracts to subcustodians but has no right to audit or visit the subcustodians' vaults. It then requires third-party audits. So we can have the custodian own or pay off the third-party auditor to give a clean audit, while knowing that the subcustodian leases out the gold into the market.
If GLD shareholders suspect so and ask custodian to prove otherwise, custodian can simply say "we have no right to check the subcustodians, see the prospectus, but here is a clean audit result" however laughably compromised. If GLD goes bust, no holder of GLD has any claim to any gold. GLD holders simply become unsecured creditors along with all other creditors, with no precedence in bankruptcy court.