FIGURING OUT WHY GOLD TUMBLED WHEN IT SHOULD HAVE SOARED

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On September 25, 2012, the news was that central banks were buying gold.  Gold fell from its morning peak.  On September 26th gold continued to fall with some recovery in the afternoon.

The International Monetary Fund (IMF) reported in its monthly statistics that Turkey, Korea, Russia, Kazakhstan, Ukraine and Kyrgyz were buying gold in July.  Turkey increased its reserves by 44.7 tons to 288.9 tons, Korea increased its reserves by 15.5 tons to 70 tons, Russia increased its reserves by 18.6 tons to 936.6 tons, Kazakhstan increased its reserves by 1.4 tons to 103 tons, Ukraine increased its reserves by 0.2 tons to 33 tons, and the Kyrgyz Republic increased its reserves by 0.1 ton to 2.8 tons.

Given the strong upward momentum in gold and all around bullishness about it, the news would seemingly have propelled the metal beyond $1,800 per ounce. The reason behind the abnormal behavior is that gold these days is controlled by momentum investors who trade in gold contrary to convention.  Traditionally gold is supposed to be a hedge against bad news, but as the focus of momentum traders, it goes up on good news and sells off on bad news.

The bad news on September 25th was the prospect of huge demonstrations in Madrid, Spain.  By September 26th pictures of violent Spanish riots were everywhere.

Buying by the central banks and riots in the streets are supposed to be perfect conditions for a rise in gold.  Interestingly, this was the first big bout of aggressive selling in all kinds of gold and silver instruments, including popular ETFs such as GLD and SLV….Read more at Forbes

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