Here’s the rea skinny on why gold crashed. Three very simple reasons.
1. Liquidity Imbalance
Gold Exchange Traded Funds (ETFs) are funds that are traded on a stock exchange and track the price of an ounce of gold. We have seen massive volume in gold ETF sales. Let me give you an example. The largest Gold tracker fund is the SPDR Gold Shares (GLD).
The way the fund works is that the price of each share is close to a tenth of the price of an ounce of gold. If gold is $1 400 then one GLD share will be $140. The thing here is that the fund owns the same amount of actual physical gold to back up the shares. Currently the fund owns a massive 36,484,650.02 ounces of gold. That’s a lot of bling!
The average daily volume before the crash last week was about 10 million shares a day, which amounts to about 1 million ounces of the real stuff.
You with me so far? Because now it gets interesting.
On the huge sell off days, these were the daily volumes for GLD.
- 12.4.2013 5,5 million ounces
- 15.4.2013 9,3 million ounces
- 16.4.2013 4,5 million ounces
That's massive compared to the average daily volumes and that volume was mainly selling.
So now the GLD has to off load the same amount of the real stuff, physical gold. Where do they do that? They do it on the London Bullion Market, just like the rest of the world.
The average daily volume on the London Bullion Market is about 20 million ounces.
So you think about that for a moment (my example takes into account only one gold tracker fund). All of a sudden an extra 5 million ounces pops up on the screens of the bullion chaps, then the next day 10 million! You can imagine the sheer terror at the amount of work these fellows had to deal with. The physical gold market is liquid, but nowhere near as quick as stock markets.
Basically what we had was a massive rush to the doors causing a huge bulge at the door, which then just broke up under the pressure.
Simple as that.
2. No Longer a Safe Haven
Why do people own gold? Because they think of it as a safe haven. If the world goes to bust, they believe that owning gold will protect their nearest and dearest. I myself believe that a Kalashnikov and the stomach to gut a rabbit with a knife will keep my nearest and dearest alive, but that’s another subject.
For those who own a real good chunk of gold, I’m talking bullion. Where do they keep it? They keep it in a vault. Right?
And where are vaults generally situated? In a bank. Right?
What happened in Cyprus?
You see where I’m going with this. Right?
The banks shut their doors. This is what happens in a banking crisis. Banks shut their doors. Now the physical gold owners have worked out that even if they do own gold, they might not have access to it. So what would be the use? This added to the gold sell off.
3. European Commission
Again Cyprus. The leaked European Commission document that stated that Cyprus would sell its gold reserves made everyone think that other central banks could possibly sell their gold reserves, pushing the gold price down.
So there you have it. Three simple reasons. No conspiracy theories, just basic panic selling, spurred on by a little bit of this and a little bit of that.
Thanks for reading this far.