Back on April 17, I wrote to you about the fall in gold and silver prices
. It did not make sense then and does not make any sense now.
Trying to make sense of the collapse of gold prices from the range of $1,700 per ounce to the depths of $1,170 has yielded no concrete causes. A 30 percent decline with no reason, Hmmm ... it has my conspiracy theory senses tingling, but I would digress if I went there.
A somewhat redeeming feature is the recent rally in gold from the bottom to about $1,370 now, a rise of 17 percent so far. I believe that gold has begun its laborious path back, but has a different road on this accent. This recovery of prices has been driven by a very strong physical demand rather than the paper purchases of gold.
You see, it is impossible to manipulate the physical gold market. People will be people, and will desire to buy gold if they choose to do so. No amount of hedges and puts placed by mega banks and hedge funds can change that fact.
Three weeks ago, I wrote to you about India's imminent short-term collapse
and I suggested buying puts on the Indian rupee. For those of you who did, you will be sitting on a nearly 70 percent gain in only three weeks, as the rupee has collapsed by an additional 7 percent since I wrote that column.
The reason I bring that story back is because even in the face of high inflation, a financial crisis, a slowing economy and vanishing jobs, Indians are still flocking to the shops to buy physical gold. Importing gold in India contributes to its trade deficit, and to control the deficit, the Indian government has increased its tax on gold imports to 10 percent. Yet, Indians continue to buy gold.
The story is similar in China, the Middle East, Singapore, Hong Kong, Malaysia and Indonesia. All across Asia, physical demand for gold has increased since the collapse of the gold prices. So while major banks and hedge funds here may have manipulated the markets, the Asian masses are buying up gold. This trend is not about to stop now or anytime soon.
As a result, gold price manipulators will at some point (I believe that point is soon) will give up on keeping the prices down and walk away to manipulate the next asset class to amass their billions. At that point, gold prices will recoil back as if a compressed spring and we will see a massive rally in gold.
To link the market events, as the Federal Reserve begins to taper its quantitative easing, we will see a rally in the stock markets, as investors pull out of the over-bloated bond markets and switch allocations. Some of this may have already begun, but I do not believe all asset classes have reflected the price change yet. The appearances of a stronger economy (due to manipulations of the gross domestic product indicator in the United States) and the Fed announcing tapering will lead to the stock rally, which will also spill over to gold and silver.
I would suggest getting back into gold if you exited the market, or add small amounts of physical gold to your investment portfolio soon before the rally in gold resumes.
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