Gold and the algorithms - not necessarily good friends.
Buying gold has a certain degree of historical support in its favor. But we live in a new computer age where many purchasing decisions are made by computer algorithms that seldom have gold’s kind of historical perspective built in. Purchasing decisions using computer algorithms are thus prone to the kind of supposedly rational choices programmed into them by their developers, which tend to focus on less esoteric calculations than those that might influence the individual’s thought patterns.
Gold and silver do not really tick the boxes. Platinum and palladium may be seen as perhaps more relevant given they are subject to an almost fully industrial supply/demand pattern not requiring faith in past performance to make computerized purchase decisions relating to the metals.
This means that perhaps gold, and maybe silver too, is not necessarily driven by the same forces which seem to be pushing paper-based assets ever higher. In part this has been exacerbated by the sea change in market access. Here a massive number of individual new players have entered the market – but their choices are often being driven by social media, and their belief in the almost messianic statements being offered up by some charismatic individuals who are adept at playing the markets.
Nowadays something as banal as perhaps a somewhat incomprehensible single word announcement on a platform like Twitter can drive a commodity, company or even a whole sector to a new height.
For the moment, gold and silver in particular don’t fit in with the algo-driven world, nor do they have the backing of a suitably charismatic promoter. The fact that they have done as well as they have, albeit in terms of underperformance in the eyes of their followers, should probably be seen as a positive. However it doesn’t protect them for the moment from the current vagaries of the modern world.
My colleague, Ross Norman, has written an excellent article on gold in the algo-driven world in which he likens gold’s situation with the computer algos to the astronauts’ mostly doomed relationships with HAL, the computer in Arthur C. Clarke’s 2001- A Space Odyssey, and subsequent novels. Ross notes:
“The rationale for the recent selling in gold has been clear … if it can be demonstrated that gold has a high inverse correlation co-efficiency with certain other assets - and there is clear logic underlying the claim - then the bright sparks that operate algos put in place a trading strategy that exploits that ‘knowledge’. It worked in gold’s favor for a couple of years and now it's working against us. No matter that the story has changed and the relationship should be ended. The key thing is the self-reinforcing element as successful trades breed successful trades, amplifying the problem.
Perhaps the problem here is that buying gold and silver is not entirely ‘logical’ in a computer’s internal processing environment. Computers take what might to a machine seem illogical out of the equation. Hunches and emotional attachments relative to a stock, or in this instance a precious metal, are thus seen as irrelevant. True the huge volume of new-age market players following the social media-inspired dream meme can rock the boat as we have seen of late. But, unless this becomes focused on precious metals it will have little effect. Precious metals are not really on the map for these types of buyers – except perhaps in the case of media-generated technical attacks, as we saw with silver around a month ago.
So what will happen with precious metals under these circumstances? Not much for the time being seems to be the answer, with gold probably remaining range bound between $1,680 and $1,750 unless some unforeseen event comes through to upset that particular apple cart. Precious metals may perhaps protect against a collapse in the prices of the currently most high-flying paper-based assets. These are never going to meet their over-hyped earnings potential whatever the outcome of the putative economic revival, though. Also bitcoin, which appears to this observer to be in a severe bubble given it has little or no real substance behind it, may be vulnerable to a correction.
Gold and silver will likely continue to offer some protection against the vagaries of the markets, regardless of algo-driven buying patterns. In my view, there is an inbuilt psyche within the still significantly large precious metals community that may prevent any significant price downturn from happening. At the same time, the massive price rise forecasts beloved by some commentators seem highly unlikely to happen, unless there is some massive global financial reset involving gold, which itself seems unlikely in the foreseeable future.
by Lawrence Williams
Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.
The opinions expressed in this article are the author's own, do not necessarily reflect the opinions or views of Rosland Capital LLC or its employees, and do not constitute financial or investment advice or recommendations from the author or Rosland Capital or its employees. The author is compensated by Rosland Capital for his articles.