February 2, 2015

Chris Powell has written an article in reply to my blog post “Looking for (gold price) clues in all the wrong places“. Actually, that’s not strictly true. He has written an article that purports to be a reply to my blog post, but completely ignores my central point. Instead, he shifts the discussion back to his manipulation hobbyhorse. Was this deliberate misdirection to avoid addressing my argument? You might very well think that; but of course I couldn’t possibly comment.

Here’s a hypothetical situation that will hopefully further explain the main point I’m trying to get across. Assume that Fred is looking for an opportunity to buy 1 million Microsoft shares, that Jack is looking for an opportunity to sell 1M Microsoft shares, that the current share price is $40 and that there is temporarily no one else looking to do a trade in these shares. Initially Jack offers his shares for sale at $42 and Fred bids $38, so no trade takes place. Subsequently, Jack reduces his offer price to $38 and the sale is completed at that price. The fact that the price fell $2 indicates that Jack, the seller, was more motivated than Fred, the buyer, but what if you knew nothing except that 1M shares ‘flowed’ from Jack to Fred? What would this ‘flow’ tell you about the price? The answer is: precisely nothing.

In my hypothetical example, the only way to know whether the buyer or the seller was the more motivated is to look at the price change. It’s the same story in all the financial markets, including the gold market. The price of something could go up on rising volume or it could go up on falling volume or it could go down on rising volume or it could go down on falling volume. In fact, it is possible for the price of something to make a large move in either direction on NO volume.

My point, again, is that the price isn’t determined by the volume or the ‘flow’; it’s determined by the relative eagerness of buyers and sellers. Therefore, from a practical investing/speculating perspective the most useful information is that which provides clues about the likely future intensity of buying relative to selling. In the gold market, these clues will be indicators of confidence in central banks and confidence in the economy.

This point cannot be refuted by quoting Henry Kissinger or a Chinese newspaper. It’s based on logic and economic reality.

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