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This Is What Volatility Looks Like

March 7, 2012 Leave a comment


Today, gold & silver gave up another 2% & 3.4% respectively, bringing the plunge from their Wednesday’s intraday highs to 7% & 14% respectively. That’s over 4 trading days. The volatility in both directions is obvious as shown in this  2-year silver daily chart. The gold chart is no different.

Let’s take a closer look at what the price actions for both metals were like in the more distant past and what to expect over the coming months. Reproduced below is an analysis of daily price volatility by Jeff Clark, Senior Precious Metals Analyst, Casey Research.


This Is What Volatility Looks Like

Last Wednesday, February 29, gold dropped 4.8% and silver 6.2% (based on London fix prices). That’s quite the fall for one day. We’ve seen prices that have risen that much, too. But as I’m about to show, these ain’t nothin’, baby.

Based on our experience, we’ve been saying for some time that volatility will increase as the markets fight their way to the mania phase of this cycle - and that once there, the gyrations will jump even higher. This call doesn’t exactly require one to go out on a limb; it makes sense since more investors will be crowding in - and volatility was high in the 1979-’80 mania.

First, let’s put last Wednesday’s big plunge in perspective. Here’s a picture of the daily changes in the gold price since 2003, based on London fix prices. (This chart is very busy, but I want to show the bulk of the bull market in one visual.)

(Click on image to enlarge)

A 4.8% decline is one of gold’s bigger one-day movements over the past nine-plus years. But as you can see, there have been a number of days where gold rose or fell more than 5%. And it exceeded 6% on five occasions.

Here are the data for silver.

(Click on image to enlarge)

Last Wednesday’s decline of 6.2% was one of the metal’s bigger one-day movements. However, it’s exceeded 10% on 14 occasions, 15% three times, and rose an incredible 20.06% on September 18, 2008.

You might think this kind of volatility is high - and it’s true. Worse - or better, depending on how you see things - the volatility in the underlying commodity is magnified in the related company stocks. This is why Doug Casey calls mining stocks, especially the juniors, “the most volatile stocks on earth.” But the thing is, metals volatility has been higher in the past, particularly during a mania.

Here’s what I mean.

The following chart documents gold’s daily price changes from 1976 through the end of 1980. Take a look at the jump in volatility in 1979-’80.

(Click on image to enlarge)

Volatility became the norm in 1979 and especially 1980. Fluctuations of 4% or more were not uncommon.

Here’s the same chart for silver. The metal’s volatility during the 1979-’80 period became extreme.

(Click on image to enlarge)

Daily price movements of 6% or more didn’t occur once prior to 1979 - but then they became commonplace.

I wanted to take a closer look at the biggest price fluctuations during this period, so I ferreted out the largest days of volatility for each metal. For gold, I selected daily movements of greater than 5%.

(Click on image to enlarge)

During this five-year period, gold saw fluctuations greater than 5% on 38 days (19 up, 19 down). Not surprisingly, more “up” days occurred leading up to gold’s peak of January 21, 1980, and more down days came after it.

And yes, gold rose an incredible 13.3% on January 3, 1980. As it turned out, that biggest one-day rise was only 18 calendar days away from the very peak of the market. And the biggest decline of 13.2% on January 22, 1980 was the signal that the top was in.

For silver, I used one-day movements of 10% or more, all of which occurred in 1979 and 1980.

(Click on image to enlarge)

The silver price had fluctuations of 10% or more on 34 days (17 up, 17 down). They occurred over a period of only 15 months, an average of more than two per month.

And yes, silver really did rise a whopping 36.5% on September 18, 1979.

So while last Wednesday’s price movements for gold and silver were big, we simply haven’t seen this kind of volatility in our current bull market.

Now let’s have some fun. Let’s say we match the most volatile days from 1979-’80 at some point before the current bull market is over. If we use gold’s biggest up day (13.3%) and biggest down day (13.2%), here’s what would happen to prices from various levels. Remember, these areone-day gains and retreats:

Gold Price

Imagine gold jumping from $1,800 to $2,039.40 in one day!

However, unless you think $1,800 is the level from which the mania starts, it’s more likely we’d see a 13.3% advance (or something similar) from a higher starting point. We’d thus probably see gold jumping to $5,665 from $5,000, for example. And further, that would probably signal we’re near the top.

Keep in mind that volatility worked both ways during the mania, so dropping from $4,000 to $3,472 or something similar is likely to occur as well.

Here’s the same table for silver, with its biggest up day of 36.5% and down day of 18.5%.

Silver  Price

Can you imagine silver starting the day at $80 and hitting $109.20 before you go to bed that night? Something like that will probably happen at least once before this bull market is over. As with gold, though, that kind of movement is more likely to take place from a higher level, such as $100 or $125 (or higher?). And a fall like $100 to $81.50 will probably be part of the trend as well.

There are some definite conclusions we can draw from the historical picture:

  • First, if history repeats, or even rhymes, our biggest days of volatility are ahead. And they will be normal.
  • Second, big price fluctuations will be common as we enter the mania and approach the peak. In fact, when large daily movements become the norm, the historical record suggests we will be nearing the end of the cycle.
  • Third, since current volatility has thus far been lower than what was experienced during the final phase of the 1970s bull market, we are probably not in a bubble, nor yet in the mania phase, and nowhere near the top. Remember that the next time you hear some nincompoop spew bubble talk on CNBC.

What can an investor do with this information? Prepare yourself for bigger daily swings - in both directions. And buying on those outsized drops is probably a good strategy…

Because we now know what volatility looks like.

Marc Faber “This year the gold price may not exceed the $1,922/oz high that we reached on Sept. 6″

March 6, 2012 1 comment
Marc Faber | Photo: LNS

Marc Faber | Photo: LNS


In a recent interview with The Gold Report, Marc Faber - an economist & publisher of the Gloom Boom & Doom Report shared his views on a wide range of topics. Republished below is an extract of his interview covering gold & silver. He opines that gold is in a bull market and that the corrections seen in gold may not be over yet.

The Gold Report: What captures the imagination of investors?

Marc Faber: Basically mania fed by excessive liquidity, with more and more people convinced that something is the Holy Grail. It was the NASDAQ in 2000, Asia before 1997, housing from 2000 to 2006–2007, or more recently China. Exactly what it is, I don’t know. But when a market has been strong, the media write about it and people are attracted to it. Then some useless academics write books about why stocks, or real estate, always go up, and so forth. The media again write that up, and more people flow into that sector.

TGR: A couple of weeks ago James Turk told us that he thinks the low price for gold in 2012 was already established early in January. What makes you think it will pull back?

MF: The big rally into Sept. 6, 2011, took the gold price to $1,922/ounce (oz) and then it dropped until the end of the year, touching $1,522/oz on Dec. 29. It has rallied, and is now above $1,700 again, but I don’t think the correction is entirely over. Corrections of 40% are nothing unusual in a bull market.

As an adviser, my duty is to always inform people of investment risk. I’m not saying I expect gold to collapse, but telling people the gold price will go up leads them to leverage up and speculate. If the gold price drops $50/oz, they’re wiped out. All I’m saying is that, in my opinion, the gold price correction is not yet entirely completed. I see significant support around the $1,500/oz level, but it could drop lower. It depends on global liquidity and on money printing by central banks. We could have a big correction if global liquidity tightens or they stop printing money.

TGR: Over what timeframe are you looking at the correction?

MF: This year the gold price may not exceed the $1,922/oz high that we reached on Sept. 6. Maybe it will. I’m not a prophet. I’m just telling people that I’m buying gold and holding it. I don’t speculate in gold. If you buy gold, you better understand that the price could always move to the downside. If you don’t understand that, don’t invest in gold—or in anything.

TGR: Investment show commentators have been talking about gold being in one of those mania bubbles you described because it’s been increasing for 11–12 years. Do you agree?

MF: No, gold is not in a bubble. It wasn’t in a bubble in 1973, either, but it still corrected by 40% then. I don’t believe gold is anywhere near a bubble phase. A bubble phase is characterized by the majority of market participants being involved in a market space. I saw a gold bubble in 1979–1980, when the whole world was dealing—buying and selling gold 24-hours a day, globally.

TGR: But not since then?

MF: No. If you went to an investment conference in 1989, 90% of the people there would have told you they owned shares in Japanese companies. In 2000, 90% of them would have said they owned NASDAQ shares. Only about 5% of the participants at an investment conference today would tell you they own gold. Very few people in this world own gold.

I don’t believe that we’re in a bubble.

TGR: Should people who aren’t yet in gold or want to add to their position wait for a correction?

MF: I have argued for the last 12 years that investors should buy a little bit of physical gold every month and put it aside without concerns about corrections. If you don’t own any gold, I would start buying some right away, keeping in mind that it could go down.

For the last 40 years in my business I’ve seen people always lose money when they put too much money into something and then it goes down. They panic and sell, or they have a margin call to sell—and lose money. I own gold. It’s my biggest position in my life. The possibility of the gold price going down doesn’t disturb me. Every bull market has corrections.

TGR: What do you think about silver as an alternative precious metal to hold?

MF: Gold and silver will move in the same direction, up together or down together. At times, silver will be stronger relative to gold, and at other times gold will be stronger relative to silver. My friend Eric Sprott thinks that silver will go ballistic. I don’t know. I own gold.

TGR: You’re on record as recommending that investors maintain diversified portfolios, with 20% to 30% each in gold, real estate, equities and cash. Focusing on equities, as we’ve discussed, means tremendous volatility. What are your thoughts? High value? Large cap? Dividends? Something more speculative, perhaps gold mining shares?

MF: Because I live in Asia, I am quite familiar with the Asian markets and economies. I have a bias toward Asian equities, especially because I can find deals in places such as Malaysia, Thailand, Singapore and Hong Kong—stocks that give me 4–7% dividend yields. With yields at those levels, at least I’m paid to wait. Even if they’re cut 5%, I’d still get better cash flow than I would from, say, U.S. government bonds. Consequently, I feel reasonably confident owning such shares.

Because I have allocated only 25% of my portfolio to equities, if the markets were to drop 50%, I would have funds elsewhere in my portfolio to buy more equities. That’s not a prediction for a 50% market decline; it’s just to say that I’m positioned in such a way that I could put more money in equities through a) my cash flow, b) my income and c) my cash position. And I do own some gold shares through stock options, because I’m a director of several exploration companies.


Read the full interview covering his investment views on bonds, stocks and real estate at The Gold Report.

PAGE is Dead. New Allocated Silver Exchange in the Making.

March 3, 2012 8 comments
Pan Asia Gold Exchange (PAGE) Building, Kunming City, Yunnan, China

Pan Asia Gold Exchange (PAGE) building in Kunming City, Yunnan, China

The much awaited China-based Pan Asia Gold Exchange (PAGE) was scheduled to start trading this June after a ‘soft’ launch at the end of 2011. This exchange that could potentially bring down the Ponzi bullion banking system has been killed before it could see the light of day, according to recent disclosures by Ned Naylor-Leyland and London whistleblower Andrew Maguire.

So “dangerous” was this exchange to the status quo that it faced interference from “a New York based entity with very strong Chinese relationships” soon after the much publicized soft launch. Another factor that helped derail PAGE was the People’s Bank of China’s (PBoC) announcement about control over domestic Gold trading outside of Shanghai.

Before we go into the details of this news, let’s revisit why PAGE managed to send chills down the spine of the powers that be. Consider the following:-

  • Currently the prices of gold & silver bullion you pay at your favorite bullion dealers are pegged to or based on the prices of gold & silver contracts transacted at the COMEX in NY and the LBMA in London.
  • These contracts are merely paper or electronic representations of gold & silver with little or no physical metals actually changing hands. They are highly leveraged, with approximately 100 oz of paper gold contracts backed by 1 oz of physical gold. For silver, the ratio is about 350:1
  • A very very small number of bullion banks (2 to 4) control up to 95% of these paper contracts, and hence are able to influence the price of physical bullion. As ridiculous as it sounds, this is the current price discovery mechanism - virtual paper metals setting the price for physical metals or the classic “tail wagging the dog” mechanism.
  • These contracts are denominated in USD.
Enter PAGE…
  • PAGE was designed to trade in 100% allocated gold & silver contracts with metals backing paper contracts on a 1:1 ratio.
  • The contracts would be denominated in RMB
What could have happened had PAGE gone “live”
  • Investors would switch from COMEX/LBMA to PAGE because of the 1:1 ratio. When they enter into a long (buy) contract, they can be sure there’s physical metals available when they want to take delivery. This is especially so after the MF Global failure. That’s loss of business from the former to the later.
  • The price discovery mechanism will no longer be a monopoly. Your bullion dealers would most likely peg their prices closer to the 1:1 contract price than the 350:1 contract price. After all, they are dealing with the real stuff - physical bullion. Without a monopoly in price discovery, the bullion banks will be less effective in their interventions of the gold & silver markets. The decades long price suppression of these political metals may finally come to an end.
  • Investors need to sell USD to buy RMB when entering into these RMB denominated contracts. Another “commodity” bites the dust as far as dependence on the USD is concerned (after Japan, China, Russia, India and Iran joins the Asian Dollar Exclusion Zone to trade using their national currencies).
  • Physical gold & silver would be moving from west to east at an even more rapid rate, speeding up the transfer of economic, financial and political power in that direction. Whichever way you look at it, gold and silver are political metals. Recall what Nixon did after physical gold started flowing out of the US following Charles de Gaulle’s demand to exchange dollar for gold.

When such a potential game changer was being conceived, something had to be done, and sure they did. In his recently published research notes “P.A.G.E. Squashed: And now for something completely different…“, Ned Naylor-Leyland of Cheviot Asset Management explains how PAGE was killed.

Just after the publicized ‘soft launch’ (with Central government mandarins in attendance) and the noise made on the internet about its implications, the one shareholder in PAGE that had a foreign listing (in the US) suddenly and stealthily increased its share-holding from 10% to 25%, acquiring additional board directors along the way. The rationale for this sudden change in the weighting of shareholders is shrouded in mystery, however what we do know is that this entity then insisted that they be allowed to build the trading platforms for PAGE from the ground up, rather than buying a working platform off the shelf to get PAGE operational in a timely manner.

This blocking tactic at board level effectively stopped the progress of the fully-allocated spot contract in its tracks, and it was immediately clear to the international-facing people that something fundamental had changed internally. Interestingly, the key Independent Director of this small listed entity that blocked the timely roll-out of PAGE is a well-known Western banker within China, whose CV includes work for the Federal Trade Commission, the Sloan Foundation (related to MIT) and his wife is a member of the Council on Foreign Relations.

London whistleblower Andrew Maguire told King World News:

I’d like to briefly remind King World News listeners just what PAGE (the Pan Asian Gold Exchange) was going to be.  This was going to be a Chinese Exchange that was to completely change the way gold and silver trade globally.

If you recall from our previous interview, it posed an immediate threat to the current fractional reserve bullion banking system.  It was the competition of a brand new fully allocated gold and silver contract being pitched up against unbacked paper contracts.  It’s not a stretch to imagine what a threat these contracts posed to the bullion banks.

The whole thing was killed and we recently found out how PAGE was interfered with.  Within hours of our King World News interview last July, I mean you sure get some hits on your show, Eric, the interference stemmed out of a New York based entity with very strong Chinese relationships.  It delayed it enough to kill it and it was killed.

Silver Lining

All is not lost. The people originally behind PAGE have begun work on developing another independent exchange which is more streamlined and better funded, focusing on 1:1 silver contracts to bypass the new PBoC ruling on gold. According to Ned, it is expected to go ‘live’ this summer (northern). Let’s give the bullion banks a few more months!

The aforementioned change in domestic Chinese rules mean that along with every other regional Precious Metals exchange, the new unnamed 1:1 allocated exchange is launching with Silver initially, which of course is the Achilles Heel of the Bullion banking system. This in my opinion is far more bullish and exciting short and medium-term than the Gold contract would have been, as the physical Silver market is so tight.

Furthermore, all the regional exchanges mothballed by the PBoC rule change can switch, and are switching to Silver trading which is not covered by the change in rules. The contract itself will be, as before, an international rolling 90 day spot one, denominated in RMB, and the new entity is supported by the same serious players within the Chinese political and military establishment as before. The physical will be acquired ahead of closing each monthly tranche and will be vaulted entirely outside of the Bullion Banks (i.e. private vaulting facilities). From there the allocated receipts will be recorded on an electronic register and the issue will be tradeable in the secondary market with the register adjusted real-time.

This is extremely good news for holders of real Silver and extremely bad news for holders of fake paper Silver who rely on the 350:1 leverage being maintained as the world’s sole price discovery mechanism for large purchases of the white metal. This effectively will be like dealing in an RMB-denominated and fully allocated version of some of the popular Silver Bullion Trusts, but rather than trading at a premium, the premium will price the issue ahead of purchase, affecting global price discovery, as previously mooted.

Read the rest of Ned’s report at TFMetalsReport.com. There also an podcast of Ned’s interview with Turd Ferguson on the same page. Listen to Andrew Maguire’s interview with Eric of KingWorldNews here.


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