Well, there’s sure been some interesting headlines recently! WAY more fun than just trying to reverse engineer the logic behind the Fed’s rate increase.
With that said, we watch gold because we think it provides valuable insight into the dollar, bonds, and the financial system. For more on all that, read James Rickards’ trilogy about money.
But something REALLY weird just happened in gold …
Gold Plunges After 1.8 Million Ounces Were Traded in One Minute –Bloomberg Markets, June 26
“Bullion sank at 9 am in London on Monday after a huge spike in volume in New York futures that traders said may have been the result of a ‘fat finger,’ or erroneous order. Trading jumped to 1.8 million ounces of gold in just a minute, an amount that’s bigger than the gold reserves of Finland.”
“Thin activity and automated trading may exacerbate such moves.”
“… trader may have … underestimated the market’s ability to absorb so much gold.”
Of course there was “thin activity!” It was 9 am in London on Monday. That’s Sunday in the U.S., so American markets were closed at that time.
Coincidentally, markets were closed in India and Turkey, two of the largestphysical gold buyers, because they were observing Ramadan.
This is notable, because this fat-fingered trader was selling PAPER gold. If a sizable physical buyer were on the other end, it could get messy if Mr. Goldfatfinger actually had to deliver the metal.
” … somebody sold it by mistake and bought it back quickly, triggering stops below $1,250.”
A “mistake”??? REALLY? Who does that?
“Oops. Just accidentally sold $2.3 BILLION of gold I don’t have … in ONE minute. Silly me. My bad.”
Now we don’t trade paper gold, so maybe we’re uninformed.
But it seems like anyone with an account big enough to make a $2.3 billion order would have some kind of double check before hitting submit. Our computers don’t even let us permanently delete an email without a double check.
“Are you SURE you really want to place a GIGANTIC MULTI-BILLION DOLLAR order for gold you don’t have? Okay then … click submit … and good luck!”
But it’s okay. It worked out for Mr. Goldfatfinger. Because after triggering the stops at $1250, he “bought it back quickly”. Whew! That was a close one.
If you’re not familiar, a “stop” or “stop-loss” is when you own a paper asset … and you limit a potential loss by placing an order to sell it AUTOMATICALLY when the price hits a certain level on the way down.
It’s designed to protect from a larger loss by getting you out fast when the market’s in free fall. Of course, to work, there have to be buyers in the market when your sell order is placed.
As we’ve discussed, the timing for this order was such that the market was “thin”.
In this case, Mr. Goldfatfinger’s $2.3 billion boo-boo triggered other investors’ stop losses, and when their computers started selling into a “thin market”, it put even more downward pressure on pricing.
But it all worked out … at least for Mr. Goldfatfinger … because he was conveniently able to buy all that gold back … probably at an even better price than he “accidentally” sold it for. What amazing luck!
Mr. Goldfatfinger must just really have that Midas touch. For the stops who got flushed … not so much.
So what does this have to do with real estate investing? Maybe nothing. Then again … maybe something.
Remember just a couple of weeks ago Bitcoin hit an all-time high?
Same day? That’s weird. Probably just a coincidence.
But with gold and cryptos looking so sketchy, it seems everyone worried about Italian bank bailouts, central bankers’ concerns about a China led global financial crisis, and (insert whatever unnerving geo-political /economic event of your choice) …
Okay. So what are we getting at?
Consider these thoughts:
You don’t have to be a wild-eyed conspiracy theorist to suspect financial markets are probably manipulated by a variety of players … including central banks, big Wall Street firms, and the occasional rogue trader.
Why anyone would trust their financial future to “assets” used as gambling chips in the paper trading casinos is hard to fathom.
But we know many people feel they have no choice. Paper investing is all they know.
That’s why we train real estate investors to raise money from paper investors to invest in real estate.
So if you know how to make money in real estate, and are willing to take on private investors, you can build your wealth by helping other people build theirs … and provide a valuable public service.
Now we’re not saying real estate markets aren’t subject to attempted manipulation. But usually, any attempts to affect real estate pricing is to the UP side. Voters don’t like it when their home prices crash.
Fortunately, because real estate isn’t highly liquid, it’s also not highly volatile … and if you focus your assessment of value on cash-flow rather than price action, real estate is even MORE stable.
That’s because while paper asset prices gyrate … and even when real estate prices peak and retreat … rents are pretty darn steady.
The closest real estate could come to being dumped would be if some big Wall Street investor decided to “close their position” in housing and dump their portfolio on some unsuspecting neighborhood.
But the odds of that happening are small.
First, there’s no stop-losses to trigger. There’s no flushing of other players to get at their inventory. So there’s no motivation to purposely crash the price.
And fund managers are probably smart enough to meter out their sales so as NOT to cause prices to fall (though we WISH they would!). They want to get the best price they can when they sell … unlike Mr. Goldfatfinger.
Plus, both homebuyers and mom-and-pop investors are standing by to gobble up any inventory dumped by hedge funds … and would welcome the opportunity to do so.
In fact, this Dallas News article says “mom-and-pop investors have more than made up for the pullback of big Wall Street and hedge fund homebuyers.”
Uh oh. Why would big players be pulling back? Is that a bad sign?
Not necessarily. In the article, Daren Blomquist from ATTOM Data Solutions says, ‘The big guys have been priced out of the markets like Denver and Dallas.”
That’s because they need big volume and can’t find it. The low-hanging fruit is gone and they’ve moved on to other things.
And in this case, the Dallas market appears to be doing just fine.
In fact, the real challenge is getting good deals in a hot market … though this may be the calm before the next wave … because some are saying more renters are expected to choose homeownership in 2017.
All this to say, real estate goes through cycles just like the economy and financial markets. But we think the cycles are much more honest, stable, and safer.
And if you’re careful to choose properties in strong markets, measure value by cash flow and not just momentum, and use stable financing structures which can endure rising interest rates, we think there’s still a LOT of investment opportunity out there in real estate.
Until next time … good investing!
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