Profit Taking Takes Down Precious Metals

by John M. Curtis
(310) 204-8700

Copyright April 15, 2013
All Rights Reserved.                                         

       Profit taking swamped precious metal markets, as gold plummeted on the London Gold Fixing Exchange over 8%, following a 6% drop when markets closed last Friday, February 12.  Since 2005, gold rose from a high of $513 a troy ounce to its all time high Aug. 22, 2011 at $1908, a nearly a 400% return-on-investment.  Cashing in on whopping profits, traders in Exchange Traded Funds [ETFs], mutual funds, hedge funds, bullion purchases, etc., unloaded gold holdings, dropping the price nearly 40% from its Aug. 22, 2011 close.  Like any bubble, gold was bound for a major correction now underway, showing, if nothing else, that nothing’s immune from profit taking.  Precious metals’ slide took also took down crude oil prices about 3% to about $88 a barrel, welcomed relief for consumers.  Apart from macroeconomic concerns, precious metals were long overdue for a correction.

             When stocks tanked in 2007, blamed largely on a collapse of the U.S. banking system, the Dow Jones Industrials dropped from a high of 14,167 Oct. 9, 2007 to its low of 7,534 March 11, 2009, a nearly 50% drop.  All during that time when short sellers ran the markets and equity investors lost ground, precious metals, especially gold, continued its unprecedented run-up rising another 200% while stocks bottomed out.  Now it’s precious metals turn to take profits.  While there are always plenty of excuses for sell-offs, including growth problems in China or the Eurozone, profit taking and greed are the real reasons.  “We have seen massive liquidation from all quarters—ETFs, funds, DTAs, specs and even Chinese and Indian physical buyers.  This is a market that has only go one things on its mind . . . get me out,” said David Govett, head of precious metals at Marex Sepctron in London.

             Much of hype about gold happened when the 160-year-old venerable Wall Street icon Lehman Brothers filed for bankruptcy Sept. 14, 2008.  Equity investors were so spooked by what happened to the U.S. financial system when the mortgage-backed derivatives market collapsed, leaving Wall Street in shambles, they swooped up precious metals, especially gold.  “If you want to be worried about China, there’s plenty to keep you awake at night,” said Sean Corrigan, chief investment strategist at Diapason Commodities Management in Switzerland.  Hitting only 7.7% growth, China disappointed investors, expecting at least 8% or greater, triggering the commodities sell-off.  With most commodities at inflated levels, it was just a matter of time before investors took profits and brought down prices.  No market can go up like a rocket without eventually coming back to earth.

             Today’s sluggish U.S. economy and recession in the Eurozone has put a dent on global demand for Chinese-based manufacturing, weakening demand for petroleum and consumer goods.  No one knows how long the U.S. Federal Reserve Board can continue buying up mortgage-backed securities in what’s known as QE3, without putting the U.S. into too much debt.  Whether U.S. taxpayers want it or not, the Fed continues to purchase debt, passing it on to consumers.  Keeping interest rates at rock bottom has helped revive the U.S. housing market, poised in many parts of the country for a solid recovery.  As real estate markets recover, homeowners have more disposable cash to pay for consumer goods and services, boosting hiring, reducing the unemployment rate and generating more tax dollars for the U.S. Treasury.  So far, Fed Chairman Ben S. Bernanke has kept the U.S. economy out of a double-dip recession.

             Unlike the 2008 financial crisis, most large financial institutions have reported record profits, fueling hiring in the banking industry.  Unlike sell-offs in the stock market, corrections in commodity market generally benefit consumers by lowering pump prices, making precious metal purchases more affordable.  ”The commodity funds that were riding this trend, big money raisers in the past several years to play to the supposed super-cycle, clear are in liquidation at some level,” said Yahoo senior columnist Michael Santoli, seeing the cyclical nature of the sell-off.  “I think it was underestimated exactly how much strong growth and therefore a lot of wealth creating in China and India was directly fueling gold and silver purchases, suggesting that something other than profit taking fueled the correction.  Santoli forgets that all stocks and commodities must take a haircut after a spectacular rise.

             As panicked investors may head for the exits, smart investors continue to dollar-cost-average or buy up downtrodden commodities at bargain prices.  When stocks were finally hammered down to the bottom in March 2009, the nation’s biggest funds were given the green light to start buying again  At some point, commodity-trading desks will receive the buy signal, swooping up depressed commodities, especially gold, at bargain prices.  How far the bottom drops is anyone’s guess.  What you can bank on is that smart investors will buy back in when the time is right.  “Paper is working right now,” said Santoli, referring to strong equity investing.  But as Wall Street’s stock market bubble begins lose air, smart investors will rotate back into precious metals.  Profit-taking in both commodities and equities while rare, it happens when it’s time to bank some profits in both areas.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.