Explaining the Crawl in Gold Prices

 Explaining the Crawl in Gold Prices

First, let’s get rational. Contrary to some rumors that have been peddling, we are not witnessing the explosion of a hypothetical bubble. First, several facts show that there has never been a bubble in this market in the first place, and secondly whether or not a bubble was going to explode, decline would be much more serious and especially much more continuous.

But it is still true that the price of an ounce of gold fell sharply these days to the point of worrying more and more people and caused the wildest rumors. In fact, this decrease can be explained by two different events that took joint action on the market.

Gold prices fell following recent announcements from the Fed (Federal Reserve) that took place shortly before the beginning of the decline in prices. The dollar rose sharply particularly in relation to euro. This assessment is partly responsible for the decline in gold prices in two ways. First, the price of an ounce of gold is denominated in dollars, so it makes perfect sense that if dollar rises, prices go down slightly by mechanical effect. And secondly, announcements of the Fed have somewhat improved prospects for dollar. This prompted some investors to return to this market, partly at the expense of the gold market.

The second important point that weighed heavily on the appeal of course is significant margin established by the CME (Chicago Mercantile Exchange), is that it had indeed raised its requirements by 21% on September 26, 2011. But know the CME is one of the leading US futures markets, and most important market for futures and options on the gold market. A 21% increase in margin call, actually deposits provided by different investors, is not a small amount, which thus forces people to settle some of their positions to fund their accounts, or simply lose their positions.

Here is a partial explanation of the collapse of gold, knowing that the current financial situation is so tense that the slightest movement is immediately accelerated by completely disproportionate reaction of many investors. And finally, we can say that gold is somehow a victim of its own success. When investors need liquidity, they still prefer to sell the assets that have been performing to make them more value, and gold is a good one of the few markets that has been performing this year. Now to try to get a vision of the next possible evolution of the price of gold one should review the various arguments which led experts to advise buy gold as a wise investment in the current economic situation.

First, though many analysts see the drop in the price of gold as recovery of confidence for equity markets, we cannot say that the financial situation has particularly improved. Europe is still not out of the debt crisis and the US economy gives yet no sign of recovery. But since a recession is taking place in many sectors of economy that will eliminate any risk of inflation, the dollar crisis is not over.

Although the Fed has not advertised as massive injections as expected, there is a safe bet that the Americans do not so easily abandon the principle of printing money. Euro is not much better placed with the explosion of euro zone looming increasingly. Now it is true that some values on the stock market were slaughtered so that the prices seem more than interesting. But the recovery is not yet assured and markets remain highly volatile. In these circumstances, gold may have reached a very affordable price and can offer an attractive investment at lower cost.

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  • Graham

    So does this mean that investing in gold is no longer a good idea? If so, than,
    sadly, we are not given any other worthy alternative. Gold has been like the
    safest bet throughout epochs…