For anyone following the recent carnage in the precious metals prices it is obvious there is a huge sell off happening. Some of the recent questions I've received look like this, "what the hell is happening to gold" or "why is gold dropping so much" and "did you see what was happening to gold" and my personal favorite, "when is this drop in gold going to end." These are all questions I've asked myself and there aren't any answers that appear in the crystal ball.
There are a number of theories and a number of factors that seem to be contributing to this panic. There are the rumors about Cyprus selling some gold, the Federal Reserve possibly winding down some of its asset and treasury purchases (which is unlikely since the economy is still fundamentally weak), and last but not least the idea that the great bull run and commodity cycle is over. All of these ideas might look reasonable on the surface, but the simple fact is that many speculators are selling because some technical levels were broken. The fundamentals for higher gold prices are still the same. The Federal Reserve is still buying $85 billion of treasuries and mortgage backed securities per month, and has been since October. Where do you think that money comes from? If you don't believe in inflation, how did the stock market go from the 2009 lows back up to record highs in only 4 short years? Magic isn't real is it? It sure seems like it sometimes. I'm just not quite sure I trust the central banks to be able to pull the money out of the system like a rabbit out of a hat. If you trust them to do it then you're probably bearish on gold, but if 2008 is any indication they won't know what is happening until it smacks them in the face.
The problem with the central banks around the world is that they keep distorting the value of money. Money really should be simple. It is meant to be a store of a value of work, and can be exchanged. It is no longer that. The central banks around the world use it as a tool to manipulate economies. Why are interest rates continually at historic lows? Why don't you earn anything on the money you save? Do you think your parents or grandparents would have believed you if you told them you would be getting negative interest rates on your money? But fear not, we can just keep working the rest of our lives so we can keep paying income taxes and finally pay off the federal debt!
Gold doesn't pay dividends, it doesn't generate income, and it doesn't pay you interest. It should never be compared to stocks. It is an alternative to paper money plain and simple. The smart people accumulate the metals the same way they do with cash. Why do you think central banks hold a majority of their currency reserves in gold? They don't do it because it's fashionable. They do it because they know the real confidence people have in their monetary authority depends on it, and because it is a true store of value. The United States reportedly holds 8133 tons of gold in Fort Knox, and it is estimated that amounts to 76% of currency reserves. Italy holds 2450 tons for 72% of its currency reserves and France holds 2435 tons for 71% of its reserves. These are some of the biggest debtor nations. The biggest buyers of gold over the last few years have been Russia, China, and India. India holds less than 10% of its reserves in gold. Russia holds less than 5% of its reserves in gold. China has 1000 tons in its currency reserves amounting to only 2%! These are the nations without unsustainable debt. The Chinese hold our debt and are stuck with dollars, so if tiny Cyprus wants to sell a few of its 14 tons (which amounts to roughly 58% of its currency reserves), I'm quite sure the Chinese would be happy to take some off their hands. Or yours too if you need to sell. Actually, call me first so I can buy it. Don't sell it to the Chinese. I happen to think a true accumulation strategy is what is really needed, and diversifying a small percentage into your own personal currency reserve is the best solution.
In conclusion, is gold volatile? Yes. Are we getting punched in the stomach on prices? Yes. Does it change the real reason central banks and individuals hold gold? No. Should you invest all of your money in gold and gold stocks. NEVER! Gold is an asset and is subject to the same unfortunate whims of speculators that any other commodity is, but it is the only real alternative to a weakening dollar and paper currencies. After the dust settles on this sell off, some might even suggest this is another buying opportunity. I'll let you be the judge of that, but I know what I'll be doing.
