The gold price spike has been a topic of conversation in recent days, and for a good reason. The commodity’s sudden rise from $1218 per ounce to nearly $1400 within the span of seven trading sessions is nothing short of extraordinary (especially when you consider that it would take another four months until we reached this point during last year). Visit www.raremetalblog.com/five-reasons-gold-prices-could-spike-again/ to understand more.
There are many reasons why this might have happened, but all in all, it’s important to recognize the gold surge for what it was: a move driven by paper-based commodities trading.
There is no such thing as the gold price. There are only futures prices and spot prices, with nothing in between to connect them.
What determines the price of a commodity:
The price of a commodity is determined by buyers and sellers who trade on an exchange. So that’s where we get our official ‘price’ from. This means that when someone buys or sells an asset on a business, it can affect the price of that asset.
For example, if someone traded a futures contract on COMEX for 100 ounces of gold at $1250 per ounce today (the current spot price), they would have just affected the future’s market with their trade – not only will the price now be higher because there is demand, but it will also be higher because there is more supply.
This can cause a self-fulfilling prophecy, where the price of gold goes up simply because people believe that other traders are buying and selling based on their belief in what futures prices should do (not to mention CBs’ printing money out of thin air). Of course, there’s no way to know for sure, but this likely is what happened.
Many traders and analysts have argued in recent weeks that the price of gold was pushed higher due to deflationary concerns from central bankers all over the world who are printing money at a rapid rate (in fact, one could argue further that things like quantitative easing and the Federal Reserve’s purchase of $40 billion worth of mortgage-backed securities per month are simply a form of gold price manipulation).
This would be an interesting hypothesis; however, we think that there might be another factor at play: ETFs. Since investors can now easily invest in commodities like oil (USO), wheat (JJG), and gold (GLD) through ETFs, it’s no wonder that we have seen such a massive move in this space recently.
There might be other factors, but for now, the important thing is to recognize what has happened so you can adjust accordingly. Then, if you haven’t already done so, buy some physical gold and silver and take profits on any short-term positions you might have in the space.
