18 February 2009

Volume and Volatility

From Sudden Debt blog:

The FIRE Casino (finance, insurance, real estate) feeds on the Two Vees: Volume and Volatility. Thus, it goes bust only when no one wants to play, when the market is flat and volumes shrink. ... As I said, market makers feed on volume and volatility, not direction. And there's the rub: so far volatility has been immense and volumes quite strong - at least in equity markets. The prediction, therefore, is that this whole crisis thing won't be over until ... you guessed it... volatility drops sharply and volumes tank ...

This also applies to the bullion game. The issue investors have to consider when storing metal is: What is the provider's business model? Where do they make most of their money? If they make most of the money from trading (entry and exit fees) rather than storage, then when interest in precious metals wane (and it will), this may put pressure on their finances. This is the situation where the temptation to sell holders' metal to cover costs with the hope that business will improve and they will replace it later, will mount.

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