Why does the gold market so often run contrary to the fundamentals? The short answer is that the bulk of the market is held by traders, making individual investors mere fingerlings in a very large pond. But rather than bemoan our relative insignificance, we can turn it to our advantage.
A diminutive running back can either charge headlong at a 400-pound lineman and take the punishment, or he could use his agility and simply run around his massive but sluggish opponent. It’s no different than playing in the same game with big money traders.
Traders have a very different stake in the game. They rarely hold physical gold but instead gamble on short-term movements in the gold market. Whether the price goes up or down doesn’t matter in the least – only that they guess the direction correctly. Selling short was invented for the same reason as was lowball poker – to make money on a losing hand.
Traders in futures have no interest in market dictates. They play only shifting market sentiment. Their main game is in equities, and when those take a dive they cash in their paper gold to cover their losses and to give them a stake for the next hand. If they are lucky they beat their cronies to the punch.
Successful investors in physical gold aren’t fazed by the traders’ antics. They use them to their advantage. They know that the rush to cash has nothing to do with gold’s value – cash just happens to be the only chips accepted at their tables. If it were allowed, those chips would most certainly be made of gold.
The fixation on cash is the greatest advantage that individual gold investors have. Whenever big money flees to cash, it leaves behind more than enough crumbs of cheap gold to satiate our most ravenous appetites.
That, of course, must eventually change. Sooner or later even big money will have to seek long-term protection in gold. To me, that has the sweet smell of revenge.
Those who had the confidence to stay the course with long-term physical gold investment will one day be the ones handing out crumbs to the tramps at the gate.