Remember that phrase? It was one of the siren songs of the heady stock market boom of the late 1990s. Of course, when used in the context it was then, "volatile" was a euphemism for rising - and the faster the stock market was rising, the more "volatile" it was said to be.
Well, as you have no doubt noticed, Gold is getting pretty "volatile" too. But this "volatility" is not confined to a rising market. This one is working in both directions.
On Wednesday (January 18), the Japanese market hit an air pocket and swooned 600 points plus intraday. The "authorities" even saw fit to close it down 20 minutes early. Since most of the selling was from foreign investors and the Japanese didn't want to sell themselves, they had to look around for a source of liquidity. They found one. Gold got hammered, closing down $US 9.80 on a spot future basis by the time the Comex boys had got through with it.
But the Japanese market did re-open the next day and promptly recovered most of its losses, so "liquidity" wasn't an issue. Presto, the spot future Gold price STORMED upwards by $US 14.50 to erase all the previous day's losses and go on to post a new bull market spot future closing high of $US 559.00.
Then came Friday, January 20. Gold went up in Asia, went up further in Europe, and shortly after the New York market opened the spot future contract climbed to $US 568.50, almost $US 10 above its close on the previous day. But then the NEW YORK stock market hit an air pocket as Citigroup and GE came out with "disappointing" earnings results and the Dow swooned over 200 points. Again, the need for liquidity came to the fore and again the Gold price swooned. From that early intraday high of $US 568.50, the spot future Gold price dived all the way down to close at $US 554.00 for the week.
Now that's "volatile", in anybody's language.
This is actually quite choice. When the players in the paper market get that "olde" sinking feeling watching the markets have a relapse, what do they turn to for "liquidity"? They turn to Gold, that much-maligned "non investment" which isn't any good to them because it doesn't churn out the "income" which they must have to survive. Right now, if it is in any way a choice (there's that word again) between abandoning the paper markets or abandoning Gold in a pinch, the paper players quite naturally abandon Gold. They always do - in the FIRST throes of any type of paper market relapse.
Remember, the Japanese stock market gained 40% plus last year. And even though US stock markets didn't gain anything over 2005, the Dow did poke its nose above the 11000 level (for the first time since before 9/11) last week. The sudden downside breaks on the Tokyo and New York stock markets this week are the first real CONCRETE signs that all might not be well on the paper markets.
There are other real signs emerging too. One of the main catalysts for the fall on Wall Street on January 20 was a disappointing earnings report from Citigroup. Citigroup cited as the main reason for its tepid earnings the LACK of a yield curve in the US. There is nothing to be gained from borrowing shorter and lending longer for US banks anymore, since there is in essence no difference in yield along the entire US yield curve. To give one startling example, the yield on six-month Treasuries was 4.46% on January 20. The only higher yield along the curve was the 30-year paper and it only yielded 4.52% - a derisory 6 basis points higher than the six-month yield.
In any sane economic or financial terms, the paper markets are of course in a horrendous mess. As of January 19, the US Treasury's official "debt to the penny" had risen to within $US 7 Billion of the current $US 8,184 Billion debt ceiling. The US trade deficit is on track to clock up a $US 2 Billion plus DAILY advance in 2006. There are increasingly loud rumbles that the US is hell bent on adding a war in IRAN to its wars in Iraq and Afghanistan - with the attendant loss in lives - and in money.
Sober, intelligent, well-reasoned and highly knowledgeable voices from all over the world have been repeatedly warning in ever more serious tones that the present financial and economic situation worldwide is unsustainable. So it is. The fact is that it has been sustained for six years now at the cost of financial distortions of an historically unprecedented magnitude.
This week, first the Japanese and then the US stock markets have faltered. The Japanese event led to a Gold sell-off followed by a huge upmove the next day. The US event has led to a Gold selloff - but we don't yet know what will happen when the markets re-open on January 23.
A Gold price correction could indeed come at any time. If and when it DOES come (and it of course will at some level), it will NOT be a signal that the almost five-year old Gold bull market is "over". It will be a signal that the cracks in the facade of the paper money markets have visibly widened to the extent that the players have been spooked into "getting liquid".
There is a problem here. The underlying assumption behind selling Gold to "get liquid" is that what one ends up with - paper currency or assets based on paper currency - are safe and will retain their purchasing power in the face of a meltdown of any magnitude on the markets which rely on them. In reality, the opposite is the case. There is no way that a paper market meldown will NOT effect the paper upon which it is based. Always remember, modern fiat paper money is an IOU. It's utility rests totally upon the assumption that it will remain a viable medium of exchange because its issuer has the means with which to "redeem" it.
The issuer has NO such means. A government can protect wealth, or it can distribute it (via taxes and welfare payments) from those who produce it to those who consume it, or it can confiscate it, or it can destroy it. But a government cannot CREATE wealth.
We have just this week seen some very early indications of the wheels coming off the paper markets. The knee-jerk reaction of the participants has not been to sell out of these markets, it has been to cast about for a means of remaining in them. That means selling something else to get the means to remain in them. Hence the Gold sell off on January 18 and the intraday dive on the Gold price on January 20. This may continue, for a while, until the upsets in the paper markets REALLY get serious.
Or it may not continue at all. Gold regained all its Japanese market meltdown losses, and then some, the next day. It will be interesting to see what happens on January 23. And on top of all that, also remember that these gyrations are taking place on the "paper Gold" markets. In the global (and they are GLOBAL) markets for physical Gold itself, the demand is steadily increasing.
It is true that in any recession/depression of any magnitude, ultimately cash is king. The question is - WHICH CASH? Will it be the paper IOUs created by governments which have no means of redeeming them in anything economically meaningful? Or will it be the "cash" which is NOT anyone's liability and which has proven itself in the marketplace (however hampered or unhampered) for nearly 3000 years?
Market participants sell Gold to gain "liquidity" to try to ride out downturns in the paper market as long as they are "confident" that the condition is temporary and that those same paper markets are fundamentally "sound". That "confidence" has never been more fragile than it is now, and the paper markets are facing a plethora of potential "crises of confidence" in the two months between now and the end of March. As long as the confidence lasts, expect Gold to remain "volatile" - in both directions. When it snaps, Gold will assume the mantle that the stock markets had in the late 1990s. It will be "volatile" all right, but the volatility will all be in one direction - UP.