Why is Gold Falling?

Hello friends. This is Vijay Bhambwani here. I hope you're trading the markets well and the markets are treating you kindly.

In this video, I want to update you about what is happening in bullion because the prices have come down and I'm sure a lot of my viewers are curious, they're anxious to know what's happening and what can be expected.

Now, in the last few videos, I have been telling you crude oil is unlikely to go to US$100 a barrel and I have been receiving a lot of very interesting, some even hostile messages on my personal inbox and direct messages etc, which leads me to believe that a whole lot of people don't concur with my view.

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But before you go and say, hey, where a minute has this guy gone of his rocker? Why is he talking about crude? Let me show you something. I am talking about bullion with a view on crude oil. Let me show you something.

These two CD cases. If you line them one after the other in a line and if one of them wants to topple, it will topple the other, all right? If you line a whole line of them, all you need to do is tap that the first one and it will keep on toppling all the others in a row.

I have just explained to you the domino theory of financial markets. This is exactly how one asset class brings down the other asset classes.

Now, why does this happen? There was a whole lot of people expecting crude oil to go up. Obviously, they bought crude oil. They paid a lot of span margins and concentration margins and ELM, extreme loss margins, to the exchanges and built up long positions.

Now, as a corollary of that trade, what really happens is if you're betting that crude oil is going to go up, you're saying inflation is going to go up, and therefore, gold and silver will also go up. So you go up there and buying gold and silver because this is a part of the logic and suddenly crude starts to dovetail. It starts to fall and fall how? Sharply. It's being falling over 2% on many a trading session. It's crossed declines of even 3% on two trading sessions.

So the guys who were a kind of sceptical, who were sending me a few unfriendly messages this is not an I told you so, but I am just telling you the domino effect has just hit crude oil and by extension, gold.

Now there's a mark to market concept. If you bought something and the value falls, the exchange through your broker, will want you to pay mark to market, the notional loss. If you do not pay this mark to market notional loss, the exchange, through the broker, is entitled to square of your transaction and sell off your long positions.

The initial margins, the span margin might be paid by way of collateral, which is shares, bonds, mutual funds, etc but the mark to market margin are specifically and strictly to be paid in cash. By cash I mean cheque, actual money. You can't give collateral.

You can have Rs 5 crore of bonds or fixed deposits or approved mutual funds and shares lying with your broker but if there is Rs 5 deficit in your mark to market account, he will square up your transaction. That is the securities law.

Now a whole lot of long positions in crude oil have got squared up by the brokers for want of mark to market margin and what really has happened is now that these margin calls have come in, a margin call means the broker calls you up and tells you I want margin, now that these margin calls have kicked in, in panic, traders are dumping other assets.

If you're in the commodity space and you got bumped off your long positions in crude oil for lack of margin, you will try to safeguard yourself by selling out whatever other long positions that you created. This is why like dominoes, like the domino effect, crude oil fell and it toppled gold.

Financial shortages often compel people to square up their transactions at a loss, and when they get upset, they tend to go on the other extreme of risk aversion and sell everything else that they have also.

Plus, there are also reports of the US resorting to tapering. Tapering would mean reducing the amount of stimulus or free money or helicopter money that they have been giving. Now, just the feeling that tapering might just come, this has set off some amount of panic.

This is why, my viewers, I have been telling you to learn about bond markets, yields, fixed income because the really, really rich ultra-high net worth and high net worth investors, know that it is the bond market that runs the equity market, not the other way around. The tail does not back the dog. It is the dog that wags the tail.

If the cost of money is going to go up, the days of easy money might just be pushed back. Which is why I recommended to you a video titled Attention Bank Nifty Traders. I explained to you why the cost of money might just go up.

So what are the levels that you need to watch for gold and silver and what we expect from here?

First of all, in spite of the fact that gold and silver have rarely come down, I am still bullish for the long run.

I am still sticking to the fact that by December 2022 the prices that you are seeing on your screen will appear like a bad dream, right? What other levels to watch out for?

I will watch if you take the low of the panic low of March 2020 when all asset classes took a wild beating and plot a high to the recent August of 2020, and if you were to calculate a retracement pattern, a back of the envelope, rough calculation tells me that for silver, give or take 700 to 1,000 bucks, give or take, the round number of 60,000 seems to be a level to watch.

Now, as long as this level holds, I think silver will consolidate and might just go up. Now before you say, what happens if this breaks, if this breaks, Mr Vijay Bhambwani will record another update by way of a video and provide you hand holding.

What happens to gold? Gold. I think 46,000 give or take Rs 500 here and there is a level that I am watching for now.

Do remember that we've tested lows of April and June, and if we are fall from there, we might just get another video update out here but till then, I would think that these are levels that you need to watch out for and more importantly, I don't think that this is a time to panic and exit out of our long positions in gold and because of these falls I keep answering your comments and messages that you send me. Please do not buy bullion on leverage. Leverage means futures.

Take delivery whether it is ETF that you prefer in gold or it is delivery in gold and of course in silver, you have no choice, you can only take delivery since I am telling you not to take futures because the cost of carry or the finance costs are many times over your bank fixed deposit interest rates. As a prudent investors, I don't like paying interest and if you tell me to pay 2, 2.5 times more than what I received from a bank FD, that's a strict no, no.

So since you have already taken delivery and it's not going to be marked to market or you don't have to pay any other penalties and charges, I think you need not worry. Come 2022 December, we're gonna have a party.

On that cheerful note, I'll bid goodbye to you, not before reminding you that on Saturday, we have a live Q&A session on YouTube wherein I think that Equitymaster subscribers should come ahead and join and have their questions answered. I look forward to seeing you for the next couple of weeks and join me in this Q&A session.

before I bid goodbye to you, I also request you to click like on this video if you liked what you saw. Subscribe to my YouTube channel if you haven't already done so. Click on the bell icon to receive instant alerts about fresh videos being put up out here.

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I wish you have a very, very profitable day. Thank you for your patience. Thank you for watching my video. Till we meet again in my next, this is Vijay Bhambwani signing off for now. Do take care of your trades and investments. Bye.