Last week, while tensions ramped up in the Middle East (and despite the Russia-Syria-U.S. ballet of oddball diplomacy, tensions remain high), the price of gold plummeted.
Week over week, the price of gold is off nearly 5% — or about $50 an ounce. Much of that downward action happened in one day, too.
What happened? Let’s have a look at that, and more!
Well, last week a representative from Goldman Sachs (the share-price of which is about to become part of the Dow Jones Index, by the way) stated that the price of gold might drop to below $1,000 per ounce. That lowered the boom on gold.
When Goldman speaks, people listen. Then they sell or buy accordingly. Goldman moves markets as was the case last Thursday. I’ll refrain from saying more on that specific point.
Aside from Goldman, much of the mainstream media is already working against gold and other precious metals like silver, platinum and palladium. Precious metals are no longer the flavor of the month, at least like they used to be.
After a great, decade-long run, precious metals have pulled back in the past year. Is it a temporary issue for long-term investors? Or is something fundamental really changing for shiny stuff? It matters with respect to the value of physical metal that you own, and definitely for the prospects of mining companies in which you might invest.
The “paper price” for gold, etc. has been on a downward slide year over year — for example, the price per ounce is down over $400. The redeeming thing is that, for much of 2013, we’ve had strong support for gold, silver, etc. in the form of physical buying on pullbacks.
Stories are now legendary about “Chinese housewives” mobbing gold selling counters of Shanghai. Or great accounts of clever smugglers bringing gold into India in defiance of government controls. With the latest price tumble, are new stories like these — anecdotal evidence for the “love trade” in gold — about to dry up?
Or consider news stories about how emerging, hot-running markets of the past few years are on the ropes. The bloom is distinctly off the rose for prospects in, say, China, India, Brazil, Turkey and many more former go-go lands. Their government-administered, goosed-up economies have outrun the kind of fundamentals — household savings and company profits — that make for long-term economic strength. Bad for gold, right?
Meanwhile, developed economies appear to be improving by many metrics. Just look close to home in the U.S., where housing had a good summer and autos are rolling off the lots at rates not seen since before the Crash of 2008.
Also in the U.S., the dollar is strong relative to other world currencies. I contend that much of the latest “dollar strength” is due to increased domestic oil output, courtesy of our ongoing energy revolution, aka fracking. With fracking, the U.S. has displaced about 2.5 million barrels-per-day of imported oil.
Now instead of imports, the U.S. economy uses domestic crude, much to the benefit of the overall economy, tax receipts, the national current account and more. Indeed, the large increase in domestic oil is one development for which Pres. Obama never seems to “blame Bush.”
Overseas, European economies are improving. Look at Germany, Britain and others. There’s less and less bad news from the southern rim (Italy in particular), which could be a sign that things have stopped getting worse and have found a bottom. Is there a rebound coming?
Japan is looking up too, despite lingering effects of the 2011 nuclear plant disaster at Fukushima. One Japanese highlight is that the International Olympics Committee just awarded the 2020 event to Tokyo. We can look forward to seven strong years of people in Japan pouring concrete for new stadiums, roads, rail, airports, etc. And you just know that the Japanese will want to outdo their rivals in China, who hosted the 2008 Olympics in Beijing.
With all this good news for “conventional” economics, and bad news for the gold-demand side, is the gold run over? Are we waiting for a golden Godot or something?
Well, not so fast. At least, don’t rush for the exits. All is not what it seems. Let’s look at one item — just one! — that could cause precious metal prices to rebound sharply.
You may know that for many months the U.S. Treasury Department has been cooking the books on national accounts. Well, that’s what I call it when the U.S. national debt has not budged by one dollar, while the debt level remains leveled-off at $16.7 trillion — which just so happens to be the current, congressionally-mandated debt ceiling.
Throughout 2013, the Treasury has used accounting gimmicks, tricks, fund transfers, restatements and other legerdemain to juggle the books. But in a month or so — or as soon as the debt ceiling is raised after Congress and Pres. Obama go through their Kabuki Theater — the U.S. national debt will quickly revert upwards.
That is, national debt will soon land on some much higher number, as Treasury’s accounting tricks unwind and the debt magically appears on the federal balance sheet.
So why does Goldman Sachs believe that gold is due for another pullback to under $1,000? Do investors no longer need gold as a risk hedge? Is the modern economy past the point where savers and investors need to convert currency into something that central banks can’t create out of nothing?
You should keep these questions in mind as you watch the gyrations of gold prices. We may have a rough patch in front of us, with painful down-swings in gold prices and related mining shares. But beware trying to “market-time” this.
Just keep in mind that over the long haul, gold and other precious metals are a key part of preserving your wealth. Don’t panic out. Goldman Sachs does things that are good for Goldman, not you.
That’s all for now. Thanks for reading.
Byron W. King
for The Daily Reckoning
Original article posted on Daily Resource Hunter
Ed. Note: Gold is a long-term store of wealth… and has been for thousands of years. Long before a Goldman Sachs or a Warren Buffett ever walked the earth. So we’ll continue to follow it, and gain exposure when we can. And there’s no better way to do that to subscribe to The Daily Resource Hunter. It’s a completely free service that gives you a quick rundown on all things resource-related… especially our favorite yellow metal. Sign up for your FREE subscription to The Daily Resource Hunter right here.
“This is the first time in recorded history that every major central bank in the world is debasing their currency – consciously, publically doing their best to drive down the value of their currency, by printing staggering amounts” says legendary commodity investor Jim Rogers.
Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.
“Also in the U.S., the dollar is strong relative to other world currencies. I contend that much of the latest “dollar strength” is due to increased domestic oil output, courtesy of our ongoing energy revolution, aka fracking. With fracking, the U.S. has displaced about 2.5 million barrels-per-day of imported oil.”
This is the second reason why gold could explode. If we looked at the 10-Ks filed by shale producers we see that most of them need massive amounts of debt to finance their ongoing operations. Just like with shale gas, shale oil is an economic loser. The industry has been able to hide this fact by using EURs that are twice what the production data is suggesting is the likely recovery to understate depreciation costs and report profits where none exist. Some time in the next year we should see write-offs of shale assets by the integrated companies that have entered the space. Eventually the primary shale players will have to follow suit and the bubble will be obvious to everyone.
Charles Hugh Smith reports on both rent and housing bubbles, and why both are vulnerable to popping...
I’ve spoken with countless traders in my time—from pros to wannabes. And the gamblers outnumber the consistent winners 10-to-1. Sure, gamblers can make hit it big with just one bet. A gambler might even catch a hot streak and double his trading account in a matter of months. But if you asked that same gambler to maintain his successes while limiting his losses (or to consistently grow his account year after year) he’d fail 9 times out of 10.
Jeff Desjardins breaks down various aspects of the Greek crisis with a focus on particular issues, like the exodus in population...
Peter Schiff reports on the broken spell of confidence surrounding the dollar, and how it may also reverse the fortunes of other beaten down currencies...
Bill Bonner explains why you can count on central banks to exaggerate the commodities cycle with more cheap credit...
“Supersoldiers” of future warfare…A switch that turns off ageing? Plus, a little robotic bug that defies physics, testing your viral history with a single drop of blood, and can plants react to stress?
Charles Hugh Smith explores how the end of secure work and diminishing returns of financialization are disrupting the traditional human experience of growth...