Price Of Gold - What Doesn't Kill Gold Helps Make It Stronger

NEW YORK - Aug. 9, 2013 - PRLog -- Nicely, it appears just like the so-called "technicals" are beginning to support my theory, and so this month I am going to depart from my common discussion of marketplace fundamentals and take a look in the COMEX gold futures marketplace. It turns out that exactly the same paper markets that helped drive the price of gold down are starting to run in to the hard reality of physical gold demand; their reversal might push gold to new highs. How high will Silver Dollar Values go? http://www.priceofgoldperounce.us/price-of-gold-per-ounce/silver-dollar-values-prices/

The globe of futures contracts is frequently confusing for ordinary investors. It's primarily the domain of institutions looking for to hedge and expert speculators. I don't suggest passive investors get involved in futures trading, however it is useful to know how these monetary instruments impact gold's spot price.

One of the factors gold futures are so risky is because of the sheer quantity of gold that transactions represent. Whenever you purchase a single COMEX gold futures contract, you gain control - and duty for - one hundred troy ounces of the yellow metal. So when the gold futures marketplace was stated to have produced "big moves" this last April, that was an understatement - on April 12th, it opened having a sell off of one hundred tons of gold!

It gets worse. Traders frequently leverage (borrow money) to purchase futures contracts, using the down payment they supply recognized because the "maintenance margin." The minimum upkeep margin to get a single futures contract is only $8,800. If spot gold is at $1,300, then a trader can gain control of $130,000 worth of gold with less than 7% down! Based on a mixture of luck and encounter, this huge leveraging can result in either incredible earnings or devastating losses.

Let's stroll through an instance, maintaining in mind that my figures are very simplified, because a futures contract isn't precisely equal to one hundred times the present gold spot price. Most of the time, futures prices are a bit greater than spot gold.

Say gold is at $1,300, which means a COMEX gold futures contract provides the investor control of about $130,000 worth of gold. A trader buys a contract with only an $8,800 margin. When the price of gold goes as much as $1,500, the futures contract is now worth $150,000. The trader can now sell that contract and pocket the distinction. He just netted about $20,000 with only $8,800 in seed cash. When the trader had merely purchased $8,800 worth of physical gold, he would have only earned about $1,350 in exactly the same time period. It isn't hard to determine how futures trading can appear thrilling and lucrative on its face.

But what when the price of gold goes down in this situation? The more the price of gold drops beneath the contract price of $1,300, the more the investor will probably be required to add to his margin to maintain exactly the same ratio of down payment to loan worth. This really is required as assurance that he won't abandon the contract. In the worst-case situation, the trader can't place up the extra funds and also his broker liquidates the whole position.

So far, this instance is of a trader "going long" having a futures contract. It could be risky, however the possible losses of a long futures trader are absolutely nothing compared to the losses somebody shorting the marketplace may encounter. Learn more about GOLD >>> http://www.sellmygold.us

Think about exactly the same situation above, except this time the trader features a short contract. He's desperately betting that the price of gold will drop sufficient for him cover his short position (purchase back the contract he sold) at a lower price. Following all, he cannot hold the contract to maturity, as he doesn't really personal any physical gold, and therefore wouldn't have the ability to provide to the purchaser.

The important distinction in between long and short traders is the fact that shorts are forced to add to margin when the price of gold goes up. In contrast to a drop in the price gold, which can only go so low, there's theoretically no limit to how high the price of gold can rise. Somebody betting on gold's demise with short futures contracts when gold enters a large bull marketplace may be totally devastated by their margin calls.

It is risky sufficient leveraging into a deal as aggressively as futures traders do, but if traders do not comprehend the fundamentals of the asset underlying the contract (in this case, actual physical gold), they are able to get into a lot of difficulty and in turn distort the price of the commodity they're trading. This really is precisely what's taking place now.

The Short Squeeze

When gold started its price drop in April, we saw a rush of paper gold flee the marketplace, such as record-high ETF outflows. Significant cash managers and hedge funds started selling their gold positions, issuing lower and lower forecasts for the year-end gold price. All of this became a significant signal for futures traders to short gold.

The selling feeds on itself because the traders seek to reduce their losses, or retain some of the paper earnings the earned around the way up. Occasionally the selling is fueled by "stop sell orders," that are orders around the books which are automatically triggered when prices decline to a particular level, in many instances just beneath important technical support levels.

This ongoing shorting of gold builds a cycle that feeds on itself. The shorts see others fleeing the marketplace and so continue to short. Meanwhile, the fund managers see the net-short positions growing and so they continue to sell gold.

When gold started to rebound last month, a huge number of shorts had been left exposed and many nonetheless stay exposed. Gold shorts are stuck holding the losing bet on an asset that's going to do the opposite of what they anticipated.

When the price rally continues, these traders will really feel growing stress to unwind their shorts prior to their losses turn out to be catastrophic. This "short squeeze," because it is recognized in finance, will reverse the vicious cycle and could send gold significantly greater than when the correction started.

What you and I can truly hope for is the fact that this huge short-squeeze becomes the impetus to focus the marketplace back on gold's fundamentals and starts to drive the yellow metal back toward its prior highs. If I am right that gold continues to be grossly undervalued, then this may be the starting of the greatest rally we've however noticed. How high will Silver Dollar Values go? http://priceofgoldperounce.us/price-of-gold-per-ounce/sil...