Gold bugs busted decisively, massive panic selling ensues

Blood running down Commodity Street as Margin Calls spike.


WASHINGTON, April 15, 2013 – Gold prices took a spectacular kick in the metaphorical teeth this morning, and we’ve spent a bit of time trying to assess this extraordinary move. Gold had been behaving like a sick puppy for months, baffling the Maven even as he moved in and out of tiny amounts of physical gold ETF IAU just as a hedge against the kind of ongoing disasters we’re seeing in Cyprus, Syria, and North Korea at the present moment. Fortunately, our portfolios were out of gold entirely this morning as…well, CNBC sums it up nicely:

Gold suffered its worst two-day selling spree in 30 years, with the metal falling down to $1,366, from a level of $1,500 on Friday. The 9 percent dive in gold follows a five percent decline in the metal Friday.”

One of our advisory services had recommended picking up shares of double-short gold ETF GLL this morning. But those shares took off at warp speed this morning to the upside and we felt it was too treacherous to chase. On heavy volume, GLL is currently up a whopping $11.11 per share just after noon today EDT, at close to the $90 mark. It’s scary. Moves of this magnitude don’t happen often and if you’re on the wrong side (which retail investors usually are), your portfolio can really get hammered, making the 0.05% return on your money market fund look like fiscal nirvana in comparison.

Gold’s waterfall decline has taken the market down with it, adding to what’s become Wall Street’s more-typical-than-not traditional Monday decline. Currently, the DJI is down around 122 points, with the S&P 500 off a hefty 16.17 and the volatile, tech-heavy NASDAQ down 25.81. Yeesh.

Our portfolios are getting his somewhat this morning. Yet we’d peeled back enough stock already that it could have been worse. We decided to take a little more profit out of our large portfolio by getting rid of our small position in KAR, a major used auto auction company we’d acquired on a secondary offering just over a month ago—marking the second time in 5 months we’ve made a profit on this company’s offerings.

We also dumped, for a modest profit, a small position in Xerox (XRX). The stock had spiked last week on favorable reports and we should have dumped it on that very day. But it’s been so volatile and largely negative lately that we decided to get out while we could, and while still netting a modest profit. The company is still likely a good investment, as it scales back its longtime emphasis on copying machines while moving, quite successfully into the more in-demand and profitable area of business process assistance. But, like everything else in this pre-“sell in May” environment, there will likely be a lower re-entry point in in this stock in a month or two.

Last week, we had started getting back into two MLPs that have done well for us in the past—the newish Alon USA Partners (ALDW) and CVR Refining (CVRR), the Carl Icahn-influenced refining arm that’s offering greater returns these days. But we’ll take a pause now, as oil refiners and stocks are also taking a beating today, along with copper, silver, and pretty much anything that has to do with metals or commodities, all of which are running scared right now due to gold’s spectacular collapse.

Oil itself is off over $2 bbl. At roughly $88.61 bbl. this morning for West Texas Intermediate (WTI), the first time it’s dropped under $90 in what now seems like months if our recollections serve us properly. Will this result in dramatically lower prices at the pump today? Okay, you knew that was a rhetorical question, of course. But prices are likely to drop modestly, even as refiners try to hold the line prior to summer driving season as they have traditionally done.

We like this price drop, actually, even though it’s damaging our small current positions in refinery MLPs. Making money is one thing. Not spending tons of it on artificially inflated gasoline prices, however, works just as well in today’s family budgeting.

With regard to gold, the game, such as it is, has been afoot for some time now and theories abound. It’s probably best to take a day or two, assemble some data, and write a more detailed piece on this in The Prudent Man, our companion column in which we try to explore important news and trends in greater depth than we can in this daily column.

In a nutshell, some theorize that central banks in some countries (Cyprus, anyone?) have been dumping gold reserves to raise cash. Others theorize that Uncle Ben and his Euro-elite counterparts have been manipulating gold downward to scare smaller investors out of hard assets and into increasingly debased currencies like the yen and the dollar for various nefarious reasons of their own, like propping up still very weak European major banks.

In any event, Friday afternoon, extending to this morning and perhaps beyond, the selling (or naked shorting, according to conspiracy theorists) is triggering margin calls on individual investors and hedge funds. We’ll likely see how true this is after 2 p.m. EDT today when margin clerks will start firing off the next big round of margin calls on gold.

For the uninitiated, whether you’re long or short an investment, if you purchase some or all of it on credit—aka margin—and the investment drops below a certain percentage of the original purchase price—often 30% of initial value or as low as 5-10% for commodities—your broker gives you two choices and very little time to decide.

The tiger behind the door of Choice #1 is “Gimme more of your money immediately.” You have very little time to respond to this Choice, and Federal rules imposed on your brokerage house give little wiggle room in tis regard. You need to add more cash or more securities to your margin account, usually within one business day, to restore the overall value of the margin account to meet percentage equity requirements.

The tiger behind the door of Choice #2 is even nastier. If your broker can’t reach you to let you know about the margin call, or if you don’t respond in time, your broker has the right to start selling off investments in your account until the margin call is met. It’s perfectly legal, and it’s all in the margin agreement you signed with your broker even if you didn’t read it.

This whole area is a lot more complicated than what we’ve just explained here. But suffice it to say, when a stock or a commodity has tanked to the extent that gold has plummeted today, you will be seeing a LOT of margin calls and liquidations which will put considerable further downside pressure on gold and other commodities that drop in sympathy.

Best bet today, and perhaps tomorrow then, is to get out of the way and avoid committing funds until the dust settles. True, if this is just a one-day yo-yo drop in gold, you might miss a swell bounce tomorrow that might occur anyway. But it’s clear here to us at least that something complex, sinister, and a bit fishy is going on in this market. It’s being done at the highest levels, and we’re not going to get in their way.

Have a good day and stay safe!

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He intends to nibble on the preferred stocks mentioned above as the occasion warrants.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17


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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17