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Is the Gold Decline Real?

By    |   Wednesday, 17 April 2013 07:42 AM

Talk about ill timing of advice! Just last week, I wrote about the logic of buying gold. One day later, Goldman Sachs came out with its predictions on gold at $1,350 by the end of the year.

The market took this forecast to heart and what happened over the past few days was nothing short of surreal. Gold prices declined from $1,560 to $1,365 in two days. I suspect the readers of Goldman Sachs’ prediction missed the part about it saying by the end of the year. This has been the most gold has fallen in two days since 1980 — a near 15 percent drop in two days.


I looked around for the causes of the massive decline and this is what I have found:

Cyprus, Spain and other European countries may be selling gold. Well this is a theoretical possibility at best. Firstly, the European Central Bank (ECB), which is aiding Cyprus, has ruled out any sale of gold by Cyprus for collateral for the shortfall funding in the country’s bailout. Secondly, all European central banks will not sell all their gold all at once to create panic in the market.

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Inflation is moderating, investors do not need gold as a hedge. Once again, it is a possibility. We have seen some headline numbers in China and India suggest inflation is lower than normal. While this is a recent phenomenon, it is likely to not remain low for long periods. Western countries have had low inflation for a few years now, so that story has not changed. Whether I believe the inflation reports under 2 percent to be accurate or not, is a whole different story. So why the panic to sell gold in two days?

Interest rates are about to rise in the United States. Here is another story that has been making the rounds for three years now. I have written several articles and read many more about U.S. bonds and Treasurys being in a bubble. While I am convinced that all the rationale behind such reports is absolutely true, I do not see the rates in the United States rising right now. In fact, Japan is easing rates and we might see India and China lower rates too. So that argument for the sudden drop in gold prices does not hold either.

Next, quantitative easing (QE) is ending soon. Another myth that has no real dates attached to it. What we do know so far is the United States is buying $85 billion in bonds each month. Japan’s central bank is buying 100 trillion yen worth of bonds and Treasurys each month. The ECB will have to drop rates and maybe start some additional easing, as gross domestic product rates around Europe are awful. So I do not see QE ending anywhere anytime soon.

Risk-on trade is in full swing. Here the justification is with stock markets on such a tear, investors are abandoning the safe haven of gold and jumping into stocks. While I do believe that there may be some level of truth here, it is a crazy notion to explain what happened in those two days since the volumes of stocks bought and sold was at very low levels and nowhere near normal levels. Even if this cause is true, if you withdraw government-level activities in the United States and other countries, there is very little real growth anywhere.

So in summary, I cannot see any real logical reason for this collapse in gold prices. That means gold will swing back up. Treat this low gold price as a Blue Light special in Aisle 5 and layer in some gold and silver, as the price stays low or falls a bit further.

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Talk about ill timing of advice! Just last week, I wrote about the logic of buying gold. One day later, Goldman Sachs came out with its predictions on gold at $1,350 by the end of the year.
Wednesday, 17 April 2013 07:42 AM
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