On Friday, in a single forward-market trading session, gold lost 5.8% of its value, and silver lost 17.8%. Considering the present state of the financial markets and the overall\u00a0condition of the economy, which for the past few weeks has been entering the second phase of the ‘W’ double dip which began in 2007, this might seem surprising, precious\u00a0metals constituting the very prototype of the safe-haven investment.<\/p>\n
In reality the fact that precious metals – particularly gold – have been rising steadily since February should be interpreted in hindsight as a sign that the financial markets were in\u00a0relatively good shape in the first three quarters of the year. For the price of gold and silver is falling at the moment not because they have ceased to be defensive investments but\u00a0because some investors who had bought into them are selling them at the moment, not for the purpose of profit-taking but because they are unable to do otherwise, as they are\u00a0having to pay off debts which they are incurring elsewhere or because the clearing houses in markets in which they have investments are issuing them with margin calls, i.e.\u00a0requiring them to increase their funding reserves in consequence of their losses.<\/p>\n
In other words, the sell-off of gold and silver that we witnessed last week and particularly on Friday amounts to nothing other than emergency selling by market players in\u00a0difficulty. One person questioned about this by the Wall Street Journal yesterday remarked that “it seems as if\u00a0the European banks are selling gold, possibly with a view to\u00a0<\/strong>increasing their available liquidity and shoring up their balance sheets<\/strong>“.<\/p>\n When we enter into a period of clearance sales in the financial markets, like the sell-off of precious metals that took place all day long on Friday,\u00a0we may say that the collapse is\u00a0spiraling out of control. Managing market risk depends on the prices of certain products rising while the prices of others fall. Now, when everyone is getting rid of everything because\u00a0there really is\u00a0no choice, as is the case at the moment, the prices of all products collapse at the same time. Covering financial positions – protecting them against loss by taking\u00a0positions on products whose prices\u00a0are rising – is no longer possible, and so risk management descends into chaos. This is what happened on Friday, when losses which they\u00a0incurred forced certain market players to\u00a0divest themselves\u00a0of a certain type of asset held by them. Such a large quantity of assets being offered for sale all at once caused the price to fall, leading\u00a0other investors to incur losses, which forced them to sell too, and so on and so forth, creating a diabolical spiral.<\/p>\n The misadventures of Mr Adoboli at\u00a0Union de Banques Suisses<\/strong><\/a>, which came to light last week, were disturbingly reminiscent of those of Mr Kerviel at the beginning of 2008. The\u00a0Friday clearance sell-offs themselves thrust us back into the frenetic atmosphere of 2008. Unlike his counterparts at\u00a0Soci\u00e9t\u00e9 G\u00e9n\u00e9rale<\/strong><\/a>\u00a0who have chosen to stay in post, Mr\u00a0Oswald Gr\u00fcbel, CEO of UBS, preferred to resign on Saturday. How should one interpret this gesture? A revival of a sense of honour in the management of banks? Or, rather worryingly, simply throwing in the towel?<\/p>\n [English translation of my September 24 post: Avis de gros temps sur la gestion du risque de march\u00e9<\/a> on my French blog by Frankly<\/a>. Thanks, Pal!]<\/p>\n","protected":false},"excerpt":{"rendered":" On Friday, in a single forward-market trading session, gold lost 5.8% of its value, and silver lost 17.8%. Considering the present state of the financial markets and the overall\u00a0condition of the economy, which for the past few weeks has been entering the second phase of the ‘W’ double dip which began in 2007, this might […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_crdt_document":"","footnotes":""},"categories":[5],"tags":[],"class_list":["post-414","post","type-post","status-publish","format-standard","hentry","category-economy"],"_links":{"self":[{"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/posts\/414","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/comments?post=414"}],"version-history":[{"count":9,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/posts\/414\/revisions"}],"predecessor-version":[{"id":423,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/posts\/414\/revisions\/423"}],"wp:attachment":[{"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/media?parent=414"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/categories?post=414"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/tags?post=414"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}