Wednesday , 24 July 2024

What's Going On With Gold??

What’s going on? If gold is the great anti-asset, the thing to hold when everything else is in collapse why is it now trading…[below $1,700 and] not $2,000? Words: 1147

So asks Merryn Somerset Webb (  in an article* which Lorimer Wilson, editor of (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. 

Webb goes on to explain, in part:

All sorts of reasons…

  1. Panic begins [and] traders deleverage in a flight to liquidity (cash and the US dollar in particular) and everything gets hammered in the process. In 2008 this effect on gold (it fell 30%) was pretty temporary.
  2. When traders get margin calls (i.e. they have to stump up extra cash as collateral for some of their trading positions), they tend to raise the cash by selling profitable positions rather than non-profitable ones (who wants to book a loss?). Gold has had an amazing run so far this year so it makes sense for panicking people to take their profits on it in a hurry. The selling of winning positions like this says SocGen is “indicative of the stress the market is under.”
  3. Then there are exchange traded funds (ETFs). The sudden market understanding of the risks the global economy faces means that all the industrial metals have fallen fast (platinum, palladium, copper etc). These metals are often traded in packages or indices along with gold. So when they are sold the gold price falls along with them. 

The fact is that while it would be nice if gold always went up in a crisis, short term it can get just as burnt as everything else, just as in 2008.

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So what next?…I am still a happy holder of gold…The only thing that could really mean that it was all over for gold would be a long period of deflation in the west and, while I’m sympathetic to the arguments for that, I am not convinced of them. Bernanke might not have turned the printing presses in the U.S. on last week (we got Operation Twist instead) but I bet he still has them primed and ready to go. The same goes for the Bank of England and the ECB.

In last week’s MoneyWeek, we quoted James Grant as saying that the price of gold was a function of the market’s trust in central banks to protect the value of our currencies. “It is one divided by T where T stands for trust and trust is a shrinking number and will continue to shrink.” I can’t see how that has changed since last week.


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