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There have been many motives offered for the recent and ongoing plunge in gold
and silver prices since the start of October from sentiment to a supposed trade against the Euro, etc, etc. but the true reason is a lot more prosaic. It’s old fashioned liquidation. Let me explain. Words: 257
So says Paulo Santos (www.thinkfn.com) in edited excerpts from his post* on Seeking Alpha entitled A Very Simple Explanation For Gold’s Weakness.
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Who is liquidating?
If I am correct, the market’s movement is simply explained by John Paulson’s funds being forced to sell due to redemptions. SPDR Gold Shares (GLD) was Paulson’s largest position by far at the end of September 2012, amounting to 30.6% of his holdings. The GLD ETF is obviously the most important gold ETF in the market, indeed, the single largest factor affecting the market, so heavy selling of this ETF can easily move the entire market.
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We also have public statements – for instance from Morgan Stanley and Citigroup – recommending that investors pull out money from Paulson’s funds, after horrible performances both in 2011 and 2012. If we know about these very public instances, we can be sure that there’s an entire iceberg below water, also redeeming its investments in Paulson’s funds.
[Frank Holmes had this to say on the subject: “Zero Hedge posted that Morgan Stanley Wealth Management recommended that its clients dump two of John Paulson’s funds. As MS clients redeemed their shares, the hedge fund giant became a forced seller of gold and gold stocks.What complicates the gold market is the fact that Paulson is such a big fan of the yellow metal that he offers a “gold share class” to investors, meaning shares are denominated in physical gold. The drawback is when an investor redeems shares, his firm has to convert from gold back to dollars, which forces him to sell his hedged position in the SPDR Gold Shares ETF (GLD). The unfortunate consequence of his actions is a short-term decline in the gold price as the market adjusts.”]
Conclusion
This thesis cannot be much simpler. What got the whole giant ball of snow rolling down the hill was Paulson’s forced selling. Paulson was GLD’s largest holder, GLD was Paulson’s largest holding by far, and we have very public proof that Paulson is seeing heavy redemptions after horrid performance. Things can’t be much clearer….
*http://seekingalpha.com/article/1076631-a-very-simple-explanation-for-gold-s-weakness
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