May 28, 2024

Biggest Loser In April Gold Crash Sees $53 Billion Vanish

coinThe stunning and unprecedented April gold crash has staggered investors with huge losses.  Over the course of the first two weeks of April gold has declined by $203.50 or almost 13%.  Since the beginning of the year, gold has crashed $313.75 or 18.5%.

So who was the biggest loser in the gold market?  That distinction belongs to the U.S. Treasury which allegedly holds 261.5 million troy ounces of gold.  The April decline wiped out $53.2 billion and the value of U.S. gold holdings have declined by $134.7 billion from the early September 2011 peak closing price of $1,895.

Central bank holdings of gold have declined by over half a trillion dollars since the 2011 high.

Central banks are among the biggest losers because they own 31,694.8 metric tons, or 19 percent of all the gold mined, according to the World Gold Council in London. After rallying for 12 straight years, the metal has tumbled 28 percent from its September 2011 record of $1,923.70 an ounce.

Investors are dumping gold funds at the fastest pace in two years in favor of equities, compounding a slump that has wiped $560 billion from the value of central bank reserves.

The losses to private gold investors, who own about 80% of above ground gold, exceeds the gross domestic product of most countries.  Privately owned gold totals about 4.4 billion ounces and the price decline since late 2011 translates into a loss of wealth of $2.27 trillion.



So where does gold go from here?  Sophisticated investors know better than to sell after a market crash.  Even after the recent flash crash, gold has appreciated 410% since 2001 compared to only an 18% increase in the S&P 500.  It would not be surprising to see a repeat of this performance over the next decade.

The Gold Bubble Debate And The Flash Crash In Gold

The “flash crash” in gold that occurred on Wednesday seemed to have as much logic behind it as the infamous stock market flash crash of May 6, 2010 when the Dow Jones quickly plunged 1,000 points for no particular reason.

Yesterday’s extraordinary price action in the precious metals has again resulted in mainstream press speculation about whether the “gold bubble” has burst.  For some perspective on that topic, Gold Bullion International has put together a great graphic – “Is Gold A Bubble?” which can be viewed below.







There is also a very bullish aspect to gold’s flash crash which has gone relatively unmentioned.  For every seller there is a buyer and someone was more than happy to buy millions of ounces of gold at a discount.  Discussing this bullish side of the gold smash down, Barry Stuppler of Mint State Gold asks “Who Bought The 34 Million Ounces of Gold?”

First of all, the volume for the CME’s most active gold contract, which is now April 2012, was 344,994 one hundred ounce contracts (34,499,400 oz was traded) a record high. Gold prices dropped $77 per ounce yesterday based on slightly negative news, specifically the lack of mentioning a possible QE3 by Fed Chairman Ben Bernanke. Mr. Bernanke’s congressional testimony does not change any of the fundamental reasons to own gold.

During my 50+ year career of trading gold I have seen similar exceptional days like this.  Traders call this type of day “shaking out the weak hands”, because many small investors and speculators are driven out of the market by stop loss sell orders and margin calls. So, who bought the 34 million ounces of gold and what will happen next?

I think that trading on today, Friday and Monday will tell the tale. If gold can stay above important $1,700 per ounce level by the end of Monday’s trading and hopefully rally above $1,725 per ounce, I believe this will tell us it was a cleaning out of small investors and speculators.  On the other hand if gold stays below $1,700 per ounce and begins trading at $1,680 or below, that could indicate that today’s rally was at “Dead Cat Bounce”.