Adrian Ash

So far, 2013 isn’t proving much fun, despite fresh eurozone crisis, plus ongoing attacks on the value of currency by central banks everywhere.

How come? Money managers have clearly grown tired of the financial crisis, if not blase. After a full decade of year-on-year gains, gold’s drop is a natural outcome, and by no means does this fall undermine gold’s safe haven appeal. It may well, however, be costing you money you’d really rather not lose.

So what’s our take? For what it’s worth…

#1. Stock markets have risen — and expecting gold (aka crisis insurance) to rise at the same time would be illogical, if not greedy. Only during the first round of ultra-low interest rates in 2003-2007, when easy money fueled the very top of the global credit bubble, did gold rise together with equities, real estate, commodities, fine art and everything else with a price tag.

Gold then continued to rise when the credit bubble exploded. If this 2013 drop doesn’t suggest the crisis is over, it at least says it’s taking a breather.

#2. Gold’s chart pattern is horrible — we’re no “technical analysts,” but plenty of professional gold traders are. Gold fell through $1,525 on Friday. Put the BullionVault price chart onto five years and you can see why that price came to be called a long-term “support” level. Technical analysis now says it’s likely to act as “resistance,” capping price gains for the near term at least.

#3. Beware “bear market” talk — the newswires today all point to gold now being in a “bear market.” They mean more than simply that the price is falling. Instead, they mean it has dropped 20% or more from its peak, the technical definition of a “bear” (according to Wikipedia, if no one else). Such drops are certainly rare for gold since it began rising in 2001. But in both mid-2006 and again in late-2008 the gold price fell harder, down more than 25% and 33%, respectively, before resuming the upward trend.

#4. Gold has risen so strongly for so long a big setback has become overdue. Gold has gone up 12 years straight in U.S. dollars. For U.K. investors, it’s risen every year except one since 1998. That’s a remarkable stretch, far longer than gold’s successive gains in the 1970s and longer even than the U.S. stock market’s record-breaking run from 1982-89. Nothing moves in a straight line, but the gold price has done a good impression so far in the 21st century.

And if this drop does prove merely a pullback, instead of the end, it could still cut much deeper yet.

Between January 1975 and September 1976, the price of gold in dollars fell by almost one-half. Lots of private investors sold out, taking big losses as U.S. inflation receded. But that crisis wasn’t yet over. As inflation then soared faster than interest rates once again, the gold price rose eightfold, to its ultimate top in January 1980.

Knowing to take profits then was still nigh on impossible, however, and as gold began a long two-decade drop, lots of private investors and professional money managers got pulled in by the violent swings of the early ’80s.

In reviewing your position in either silver or gold today, beware of panic selling. See how much money you’ve got at risk and remind yourself why you got into precious metals in the first place. Has the long-term picture changed? We don’t believe the financial crisis is done yet. But right now, Wall Street and the gold price say otherwise.

Regards,

Adrian Ash
for The Daily Reckoning

This article originally was featured at BullionVault.

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  • http://www.pipstoday.com/ Shawn James

    That’s great historical price of gold that means we can hope after this fall, gold will reach good position. I have invested in gold ETFs.

  • Rusty Fish

    With this deepening selling crisis it is best to write some soft tone,
    consolable theories bearing alleviating touches. As you know some
    gold bugs in the reckoning bracket are injured by the landslide fall.
    Some positive hope and cheer. After all, things are not that bad.
    Crisis turns opportunity.

  • Mario63

    There are so many different theories about gold fall. So far I haven’t yet read a convincing one.
    Under such circumstances it’s reasonable to ask the old question: “Cui prodest?” Who are the winners?
    Well, I have my own weird opinion about that. At least three hypothetical actors.
    One is the FED. They are quite aware that gold is the only foe USD must confront as internationally accepted store of value.
    Another one is US government in its confrontation with Iran. It’s well known that Iran, having been cut out from the USD market by sanctions, uses gold as a means of payment in its transactions. Hence Iran “gold money” has been seriously devalued.
    Another winner is obviously Israel, for the same reasons

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