Why Wall Street is unmoved by global gold fever

Moms and pops in developing markets see the world very differently than professional traders do.

By Minyanville.com May 6, 2013 2:33PM
Hundred dollar bills surrounded by gold copyright Anthony Bradshaw, PhotographerGold-buying fever continued unabated among the untutored masses worldwide last week. Imports to India, the biggest gold consumer by far, were running at five times average levels, according to investment bank UBS. Chinese smallholders used their May Day holiday not to head for the beach, as this column naively suggested last week, but to flood the gold dealers in Hong Kong. Turkey bought more gold in April than in any month since the fateful days of August 2008. And so on.

Were the financial pros back in New York and London impressed by this spontaneous outpouring of gold love? Not a bit. 

The mood in Bloomberg's weekly gold analysts' poll darkened substantially in the May 2 results: 20 gurus predicted falling prices, against nine expecting a rise and four abstainers. A week earlier, the bulls and bears were evenly matched. The latest figures from the U.S. Commodities Futures Trading Commission, published April 30, show swap traders holding nearly twice as many short as long contracts on gold.

What might Wall Street know that moms and pops in developing markets do not? One hint comes from an interesting bit of research published by French bank BNP Paribas last week.  It seems -- and we should all be thrilled to know this -- that structured finance has infected the ancient art of gold trading through an instrument known as a "reverse convertible note" (RCN).

This involves a financial institution lending cash to an asset buyer, at an elevated interest rate, but in return granting the buyer a put option to sell the lender said asset at a pre-agreed price. Investopedia tells us that RCNs "provide a predictable, steady income that can outpace traditional returns."

Unless, of course, the value of the underlying asset falls sharply and the put option triggers. This is just what happened when gold started to tank a few weeks ago. "It's hard to determine what was the biggest cause for gold's decline, but structured products played a part in exacerbating the downward spiral," BNP's chief of commodity sales, Guillaume Picot, told Bloomberg.

But this latest necromancy with RCNs is just more proof of a bigger picture problem: professional and retail gold buyers are living in separate worlds psychically if not geographically. The pros measure gold's performance against that of other assets, particularly stocks, and stocks have been killing gold for going on two years now. The S&P 500 ($INX) has climbed by nearly 40% since Oct. 2011; the dominant SPDR Gold Shares ETF (GLD) has lost 15%. 

At a certain point all but the hard-core gold bugs will give up on the idea of the metal outperforming. The mid-April market panic seems to have been that point. All the more so as the main intellectual argument for gold -- that central bank credit expansion will dilute "fiat" currencies and spur a new bout of monetary inflation -- keeps stubbornly failing to come true.

The retail buyers lining up to grab gold at "bargain" prices don't care about or trust stock markets, for the most part. In India they are acting on a time-honored tradition that precious metal is a woman's mad money, her potential salvation in the event of marital disaster or widowhood. Gold stashes are passed down from mother to daughter, or showered on brides as a wearable testament of financial independence. So consumers will always buy more if the price looks affordable.

The retail purchaser has the numbers in the world gold equation. Exchnge-traded fund (ETF) investors sold off 174 tons of metal in April, a record for them and enough to spur a market crash. But jewelry and gold-coin/bar buyers scooped up 222 tons in an average month last year. So a bull run at the shops can easily offset a bear patch on Wall Street in terms of raw demand. 

But the pros can move the market more quickly with cascading instantaneous sell-offs of fund holdings or collateral on their reverse convertibles. Thus the gold price plunged by 13% in two sessions between April 11 and April 15, and has gained back only half that despite the masses' positive response.

At the moment the market is in stalemate, having done basically nothing last week. The near-term outlook would have to be called a bit bearish. Institutional investors look determined to shave weightings on gold so long as equities stay buoyant. The retail frenzy has to calm eventually, especially as India’s spring wedding season is winding down this month.

Two caveats to this modest prediction, though: The "bearish" analysts in the Bloomberg poll nonetheless expected an average year-end price of $1,550 an ounce, 5% above current levels. More important, last time the mavenocracy was so gloomy on gold, in Feb. 2010, it was also dead wrong. The metal proved to be in a short-term correction and climbed by 50% over the following 18 months.

So go figure.

More from Minyanville

May 6, 2013 3:34PM

It is interesting how paper "precious metals" such as ETF's reflect spot price, but

physical precious metals do not. Case in point silver = $23.95 per ounce, silver eagle

one ounce coin is $31.44 on Ebay. More than a 30% premium.


Mom/pop actually buying and taking physical possession. This will probably not change

over the near term.

May 6, 2013 4:48PM

Maybe just for collector's value....Rick.


Nobody serious about buying Gold/Silver.....Goes to Ebay...

At least none that I'm aware of, or would be that dumb about Silver and Gold..

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.