Published On: Mon, Feb 25th, 2013

Another Bearish Sign for Gold?

The CME Group recently lowered its initial margin rates for gold, silver and platinum.  That is a move that is usually supportive of prices rising in the future.  In other words, it is a very bearish sign for gold, silver and platinum as authorities are stepping in to increase the appeal of the investment due to the lack of demand from the market to take the prices of the precious metals higher.

This move by the CME Group is needed as gold is testing several very important support levels.  Should reports come from the G-20 meeting that are viewed as being negative, gold futures could easily go beneath $1600.00 an ounce.

That is a very important trading level for The Yellow Metal, as it just experienced negative week on week settlements.  What is happening with gold is more than just a short-term dip in the market, as the chart below shows how the exchange traded fund for gold (GLD) has collapsed as the exchange traded fund for the Standard & Poor’s 500 (SPY), a broad measure for the stock market, has soared since after the presidential election in the United States:

gold copper graph


Based on the chart above, investment capital has been returning to the equity markets.  For that reason, the Dow Jones Average is approaching its all time high.  By contrast, The Yellow Metal has been trading sideways for the past 17 months.

In addition, uber investors such as George Soros have starting unloading the GLD.  For the thrird quarter of 2012, SEC filings revealed that SOROS Fund Management sold 720,000 shares of the GLD.  About that, Bob Haberkorn, a senior commodities broker observed, “When you get headlines that Soros is pulling out…that’s enough to blow out any weak (investors) in the market.  This move, it’s big enough to put some panic in the market.”

This was bound to happen.

Since 2007, central bankers, led by Federal Reserve Chairman Ben Bernanke, have been creating trillions in US Dollars, Euros, and Yen to revitalize the financial markets and recapitalize the global banking system.  After bottoming out in March 2009, the Dow Jones Industrial Average has more than doubled.

Eventually this had to draw away investment capital from gold and other precious metals.  A major factor is the low interest rate environment created and perpetuated by central bankers around the world.  This puts a premium on dividend-paying stocks due to the low or no yields from other investments, ranging from bonds to commodities.

Can the CME Group revitalize the price of gold, silver and other precious metals against the forces of Chairman Bernanke and the world’s central bankers?

Maybe in the short term.

As George Soros once observed, in the short term, financial markets are “chaotic.”  But over the long term, financial markets are efficient.  As a result, the long term goals and resources of global central banks will be reflected over the short term moves of a designated contract market like the CME Group.

For the long term, the recent move by the CME Group is a tell that there is a bearish outlook for The Yellow Metal and others.  If that was not the case, the CME Group would have let market demand take the price of gold, silver and other precious metals higher.  Obviously this was not emanating from its membership, so the CME Group had to take action to try to prevent an more a fall in the price of precious metals.  There are far greater market forces lined up to prevent this from happening.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.