Gold Price Fall. What’s gold’s problem?

Gold Price Fall

Recent gold price fall

The 14% gold price fall over the last few days has stunned the market into a panicked selling frenzy! Gold wasn’t alone in its descent and in fact all commodities have lost considerable value. With less people trusting the banks after what happened in Cyprus and now Portugal – people are now starting to ask – “what shall I do?”

The answer is straightforward but before we go down that road – I want to make it clear how we got here:

It wasn’t long ago that the vast majority of market participants PHYS01_Animated_Gif_1_MPUand analysts were predicting $2,500 an ounce for gold – some even by the end of next year. These predictions were made in the face of weakening global economic circumstances. Europe is technically bankrupt and can’t afford to repay monies borrowed. Cyprus has just set a dangerous precedent of helping themselves to people’s bank accounts in order to raise money. People are of the opinion that this could happen in Portugal and wider Europe and consequentially – people are being turned off using banks. Confidence has dragged European stocks down and wealth is dissipating into thin air.

Have all of these problems disappeared? I very much doubt it! In fact to the contrary – it’s got even worse.

  • Cyprus is still short of considerable cash and announced last week that they will have to sell 400m Euros of gold to raise money. Such of move would of course push the price of gold down. The institutional investors, hedge funds and traders saw this as a huge opportunity to take their profits and sell before Cyprus does. The intention was of course to manipulate the price and create a downward spiral so that the institutions could buy back into the market circa 7/8% cheaper!
  •  Simultaneously – the U.S decided to jump on the band wagon and re-iterate its commitment to no further money printing. Something they always do months before they hit the button on the money machines.  This strengthened the greenback and further depressed the gold price.
  • Traders around the world had lost considerable money on sinking European stocks and as such needed to cover losses and margin recalls by selling gold; this further depressed the price
  • All of the above created a knee-jerk selling frenzy which continued the downward spiral and again triggered automatic sell orders for the traders.

I forgot to mention that the hedge funds and larger institutions are now taking advantage of the 14% discount and buying back into the market. Cyprus never sold in the end nor did Portugal. It’s now clear to see who benefited from the gold price fall!

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The end result is that gold is now 14% cheaper than it was 10 days ago. This coupled with the fact that the world’s problems are still more a concern today than they ever were surely means that gold now represents a stronger buying opportunity.

The light at the end of the tunnel for gold and silver market bulls, as far away as it may now seem, is that “blood in the street” is usually a value-buying opportunity that occurs only a few times in a decade, if that much.

Daniel Fisher

Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.

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