Physical Gold Immune to Flash Crashes

Yesterday a British stock trader was arrested on criminal fraud charges for stock market manipulation. The Commodity Futures Trading Commission and the United States Department of Justice accused Navinder Singh Sarao of single-handedly triggering the “flash crash” of May 2010. During this crash, the Dow Jones Industrial Average plunged about 600 points in just minutes, representing a loss of almost $1 trillion in market value.

Sarao used computer programs to trade E-mini S&P 500 futures contracts in massive quantities. Sometimes he accounted for 40% of market activity, according to the CTFC. He supposedly made $40 million in profits over four years.

The news highlights just how fragile the financial “paper” markets can be. Often a dramatic event like the 2010 flash crash can be caused by just a few market players, though they are often part of a large institutional firm. In this case, a single trader using computer software allegedly spooked the markets enough to cause a major panic and temporarily destroy the value of hundreds of companies.

Futures contracts are a very popular method of investing in gold nowadays. They allow speculators to bet on whether the price of gold will go up or down in the future. This case serves as a stark reminder of how volatile the value of those futures contracts are. When you invest in gold through the futures market, you don’t actually own or possess the physical metal. Instead, your so-called investment is merely as stable as the bits and bytes in the computer system that someone like Sarao could manipulate.

Physical gold bullion, on the other hand, is insulated from rogue traders and major manipulation through computers. Gold reserves are dispersed throughout the world in central bank vaults, individual security deposit boxes, under the beds of Chinese housewives, and perhaps even buried in your own backyard. It’s next to impossible for a single entity to gain control of 40% of the physical gold and destroy the value of your gold holdings.

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