Gold in the age of high-speed electronic trading

Gold in the age of high-speed electronic trading from USA Gold

“The best thing you can do is know how to have a balanced portfolio.”
Ray Dalio, Bridgewater Associates

“The Flash Boys story put in jeopardy billions of dollars of
Wall Street profits and a way of financial life.”
Michael Lewis

What’s the line in that popular song. . . .  “Are you happy in this modern world?”

In an article headlined Robots conquered stock markets/Now they’re coming for bonds and currencies, Bloomberg finance reporter Lananh Nguyen tells us: “In the most liquid equity markets, more than 90 percent of trades are executed electronically, according to estimates from Greenwich Associates. That compares with 79 percent in global foreign exchange, 44 percent in U.S. Treasuries and 26 percent in U.S. corporate bonds, with the most room for growth in the latter two markets, according to [Kevin] McPartland at Greenwich.” [Link]

“These algos,” said hedge fund guru Stanley Druckenmiller toward the end of last year, “have taken all the rhythm out of the market and have become extremely confusing to me. And when you take away price action versus news from someone who’s used price action news as their major disciplinary tool for 35 years, it’s tough, and it’s become very tough. I don’t know where this is all going.” In other words, human investors have become strangers in a strange new land of computerized trading and investing.

“The best thing,” warns Ray Dalio the famed hedge fund operator, “is don’t play the game, because it is pros against you. We spend hundreds of millions of dollars a year to get an edge, and others do that too. So it’s very difficult for the individual investor to assume that he [or she] can pick something better. The best thing you can do is know how to have a balanced portfolio … because you ain’t going to win that game.” Dalio heads up Bridgewater Associates, the largest hedge fund in the world. He is a long-time advocate of gold ownership and his fund holds a significant position in the precious metal.

In the event of a major software-driven panic

Just this past January, Morgan Stanley and Goldman Sachs requested counterparties forgive rogue, machine-driven trades that caused a $41 billion flash crash in a matter of seconds. Though concentrated in a single stock, such anomalous events serve as a cautionary tale on how a full-out, machine-driven panic might evolve on a larger scale.

Because gold does not rely on the performance of another party, it is detached from the matrix of interlocking counter-party risk and occupies a unique place on the financial balance sheet as an asset of last resort and the final arbiter of value.  That is why nation states and central banks hold large amounts of it on their own balance sheets and why funds and institutions are more and more moving to it as an offset against other trading strategies.

Investors have always viewed gold as a reliable hedge against inflation and deflation. In the years to come, they might very well come to know it as an effective hedge against computer-generated financial mayhem as well.

Gold’s parabolic rise remains intact

Gold, the old saying goes, likes to take the stairs up and the elevator down.  The first chart (shown below) illustrates the process.  Since its most recent elevator drop which began towards the end of February, gold seems to have consolidated at least for now above the $1275-$1285 support zone.

Technical analyst Clive Maund sees the recent drop as part of a larger process – a parabolic rise as illustrated in our second chart.  “The rather sharp drop in gold late last week,” he says, “especially on Friday, came as something as a shock to many investors in the sector, yet as we will proceed to see it was set up to react back here or soon, and a period of consolidation or reaction at around this level will actually put it in a better technical condition to mount a sustainable breakout above the key $1400 level. On its latest 7-month chart the 1st point to observe is that gold is still well within our parabolic uptrend, whose lower boundary is coming into play and providing support, as is the rising 50-day moving average, with additional support being generated by premature sellers in the small Pennant pattern that formed during the first half of January. This is why it closed well off the lows on Friday, and why it could now resume the upward path again soon . . .”  (Please see his Gold Market Update for the full analysis.)

Chart courtesy of TradingEconomics.com

The return of quantitative easing

Suddenly, investors are returning to a safe-haven mindset following reports of abrupt slowdowns in both China and Europe. The central banks of both countries have moved quickly to announce stimulus measures and support for their banking systems in policy U-turns reminiscent of past quantitative easing programs. Those announcements, rather than instilling confidence in the markets, created a sense that the oft-predicted global slowdown might actually have begun. The economic gloom gained momentum when the Labor Department released a jobs report, suggesting that the U.S. economy might be slowing as well. Gold and silver responded immediately with surprisingly strong price advances.

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