Liquidity Cuts Both Ways In The Crazy Gold Market

Friday’s sell-off in gold sent the yellow metal into a bear market.  In other words, the value of gold is down 20 per cent from its recent high.

At least some of this elevated volatility can be attributed to the fact that it’s just easy to sell gold.

This is apparent in the dumping of Gold ETFs by investors.

“Prior to the introduction of Gold ETFs, investors seeking exposure to the metal were limited to gold mining stocks, bullion, coins and futures contracts, which carry among them extra risks including mining company fundamentals, bid and ask spreads, valuation, storage costs, liquidity constraints and futures expiries,” said Oppenheimer’s John Stoltzfus in an interview with Business Insider last December.

“We surmise that the introduction of the U.S.-traded Gold ETF (GLD) on November 18, 2004 has been in no small part responsible for the persistently good performance of the precious metal for close to 8 years since.”

This chart from Stoltzfus perfectly illustrates that point.

Gold ETF

In a phone call on Friday, Stoltzfus told Business Insider, “Liquidity cuts both ways.”

As prospects for interest rates to rise down the line, Stoltzfus notes that investors have to ask themselves “What is my best choice here?”

“Combined with extreme liquidity, it’s easy to respond to that thought,” he said.

ETFs have allowed investors and speculators to easily rush into gold.  And that same investment vehicle is allowing them to rush for the exits.

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