Gold experiences greater volatility

Inflation was also on the minds of the Bank of England’s policymakers, but more like the flower garden variety thereof (1.5% by the end of 2012). Commodity price-inflation has pushed short-term British inflation levels to well above the 2% target (3.1% in September as a matter of fact).

However, such a development is also possibly indicating that the BoE’s likelihood of continuing to mimic the Fed (with more easing) is shrinking at this juncture, unless, of course, “outside” events (from the global or eurozone economy) dictate a different course of action.

Much attention will now be directed at the G-20 summit in Seoul. U.N. Secretary General Ban Ki-moon stated (in a thinly veiled reference to currency wars) that “We cannot afford to think narrowly about development and economic growth ... all countries and all peoples have a stake in the management of the global economy. The voices of the vulnerable must be heard." Despite such calls for coordination and cooperation, currency market pundits do not expect specific targets or guidelines to be contained in tomorrow’s summit summary statement.

There certainly will be no shortage of attention being paid to these markets by hot-to-trot ETFs for the foreseeable future. Perhaps, too much of a good thing, all of this ‘attention.’ The Kaufman Foundation says that ETFs are a bigger threat to market stability than high-frequency trading has been (and we all know what kind of market ‘event’ that type of activity led to recently).

“ETFs are radically changing the markets, to the point where they, and not the trading of the underlying securities, are effectively setting the prices of stocks of smaller capitalization companies, or the potential new growth companies of the future,” said Harold Bradley, Kauffman’s chief investment officer and co-author of the report when questioned by Marketwatch.

Do not- for a minute-think that such cautionary observations apply only to stock-oriented ETFs; not at a time when we have (essentially) off-exchange hoarding of certain metals (see silver/platinum/palladium, at a minimum) and other commodities engendered by the rise of the ETFs. Yet, certainty about continuing gains in any niche being currently impacted by ETFs remains absolute.

Not so fast, advises Barry Ritholtz in a Bloomberg opinion piece on…certainty versus uncertainty. Just two days ago, absolute certainty reigned in gold forums about a return to a gold standard, while others, vehemently disagree. We do not need to rehash the certainty about $X,000 gold – it’s all too well known.

For those willing to consider what Mr. Ritholtz has to say, there are valuable take-home bits of food for thought in his perspective. Consider: “Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.

“Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?

“History teaches that whenever the opposite occurs -- when certainty overwhelms uncertainty -- the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster.” Sound familiar? You bet. Make your bet(s), while considering the above. You can thank the man later for keeping your eyes (and mind) open and your head at sea-level.

Reporting from above cloud level (on yet another flight),

Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America

Websites: www.kitco.com and www.kitco.cn

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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