Is The Bull Market Over For Gold?

Gold has not made new highs in many months. Gold peaked last year at US$2067 on August 6. The 7 month down leg of more than 18% as been deep enough and long enough that some commentators are now saying that the bull market has now turned to a bear market for gold.  Losing faith is understandable because falling prices feel bad. But this week we want to show that current prices may not reflect reality. We will review the story of Archegos Capital Management which proved that prices often are false signals, a picture painted by others who have their own agenda. Then we can relate that story back to gold and silver by making the point that 7 months of down leg means nothing.

Often What We See Is Just What Others Want Us To See

Archegos is something almost no one heard of until last week. Its founder has had past run ins with stock market regulators for breaking the rules. Regardless giant global banks like Mitsubishi, Credit Suisse and Nomura loaned billions of dollars to Archegos. Importantly those loans appear to have been on the scale of about 10 to 1. For example, if Archegos started with one billion, they then borrowed ten billion against that one billion, making a total of eleven billion available for ‘investing’. So its basically a hedge fund but since all money comes from the owner, its called a ‘family office’.

Apparently, Archegos investment strategy was to keep pouring money into the same few stocks so that the resultant rising price action would draw other investors into those same stocks at higher prices. Presumably Archegos intended to spark a rally and then sell into that rally near the top for a nice profit. Today’s main lesson is: Price action does not always tell the truth.

Instead of selling at the top, Archegos suffered a huge margin call for many billions of dollars. Apparently, they had borrowed so much money, from many different banks, that once all the banks came realize the size of the debt, faith was lost in Archegos.  The giant banks will all lose billions and Archegos itself may even have the original billion wiped out to zero. Thus, today’s second lesson is: Banks have a simple business – they rent out umbrellas on sunny days but need umbrellas back when it rains to keep themselves dry. Sometimes, as in the case with Archegos, they get stuck in the hurricane without any cover.

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