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Despite continuing QE and huge government deficits the price of gold has fallen 35%
since its peak in 2011 and is down over 10% from its highs this year. Is there a logical explanation for this? I think there is. Read on.
The above introductory comments are edited excerpts from an article* by Cullen Roche (pragcap.com) entitled Why is the Price of Gold Falling?.
Roche goes on to say in further edited excerpts:
You could argue that gold is the only universal form of money and has been for quite some time (though I think that is waning to some degree). Because of this its users embed a premium in its price when it is seen as protecting against fiat money and its potential inflationary problems. [While] I can’t be certain, and I could be totally wrong, but if I had to guess I would argue that some of this “faith put” is coming out of the price over time because the inflation bet has been obviously wrong.
The story goes like this:
- In 2008 & 2009 investors see the Fed printing money and the government debt exploding. They naturally assume that this will lead to inflation because the econ textbooks all teach us that the government “prints money”.
- Instead of buying US Dollar denominated assets you logically buy real assets to protect yourself from the coming high inflation.
- As the years wear on you become convinced that the inflation is still going to come eventually even if it hasn’t come yet.
- As we near years 3, 4 & 5 the inflation story starts to look a little shaky. What if that high inflation isn’t going to come?
- Then, as year 5 comes and goes, the high inflation still hasn’t hit and you begin to totally question the foundational reasons for having ever bought into this theory in the first place.
- Demand continues to slow as the theory looks increasingly shaky….You get the point.
Said differently, gold investors embedded a huge premium in the price of gold betting on a disastrous inflation in 2008 & 2009 and, as it’s become more and more obvious that that high inflation isn’t coming, the premium has been sucked right back out.
That’s my theory anyhow. Who knows if it’s right, but it would seem to make a good deal of sense to me.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://pragcap.com/why-is-the-price-of-gold-falling (Copyright © 2014 All Rights Reserved)
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We believe the same thing and it may continue for a few more weeks.