Gold Since 2011

Over the past few weeks metals investors have been watching gold fall to levels it hasn’t touched in four years. There are signs that this long decline might be ending, leaving an opening for smart buyers to get in at a bargain price, but what can we expect in the future? Is past performance a reliable enough guide?

Looking back over the last five years, what really stands out is the heights gold reached in the late summer of 2011. Following the 2008 financial crisis many investors moved money to gold as share prices plummeted. It didn’t take long for the Dow to start regaining the lost ground – by the middle of 2009 it was back on an upward trajectory – but the recovery wasn’t robust and there were frequent dips. With all the major economies struggling to pull themselves out of recession the markets were painfully aware prices could fall back at any time, so a safe haven like gold saw strong demand. By mid-September 2011 it was trading at $1,860 per ounce and looked set to keep going to the $2,000 mark. Then, on September 23, it abruptly fell by more than $100 in a single day.

The usual reason for a sharp fall in gold – a jump in stocks – doesn’t apply here. In fact the Dow had lost nearly 500 points the day before and was showing no sign of recovery. Many analysts blame gold’s losses on the CME Group raising margin requirements by 21 percent; the previous time they did this it triggered a similar drop in gold prices. Whatever the cause there was a strong adjustment downwards, with gold falling to $1,600 by the beginning of October. It then rallied and made its way back to $1,800 by the end of that month, and fluctuated between $1,500 and $1,800 until October 2012. That’s when it started the downward trend that, hopefully, is bottoming out right now.

That trend hasn’t been an even one; there have been several points when it looked like reversing . Most of the drop happened between October 2012 and June 2013, when the spot price touched the $1,200 barrier for the first time since 2010. Then it climbed back to $1,400, dropped all the way back again by the start of this year and started climbing once more. It reached its 2014 high of $1,382 in late February and it’s been mostly downhill from there.

Overall the decline of gold can be linked to the recovery in the equities markets. Both the Dow and the FTSE 100 have been ratcheting up since 2009, and inevitably that’s going to slowly rebuild confidence in stocks. Because lack of that confidence is what drives investors to gold in the first place, as it returns they’re going to sell metals and make their way back to shares. However what we might be seeing now is the pendulum starting to swing back; the rise of equities has stumbled a couple of times recently and while the main indexes haven’t lost any ground it doesn’t look safe to assume they’re going to keep rising in the short to medium term. Gold price charts for the last two weeks seem to show more interest in a reliable hedge against a bear market, so while we don’t think gold will be back above $1,800 any time soon a return to $1,400 is a different story.

Major US banks & Derivatives

When people talk about huge and worrying numbers in finance the one they focus on most is the US national debt. At $17 trillion that’s a number too big for most people to comprehend. The odds of it ever being paid back are remote, and eventually it’s going to reach a size where just trying to cover the interest will bankrupt the nation. Believe it or not, though, in the big scheme of things it’s pocket change.

We’ve all heard of banks that are too big to fail. There used to be four of them in the USA; now there are five. The expression isn’t exaggerated; every one of those five banks is exposed to the mood of the global financial market on a scale that dwarfs the national debt. Yes, it really does. The total size of that exposure is difficult to work out because it’s such a complicated web, but by picking out one strand of it we can get an idea of how big the problem really is. That strand is derivatives.

If you’re looking for secure investments you need to buy things that are real, that have actual inherent value and that somebody will want to buy. Gold is the classic one; it’s what used to back up the US dollar as well as the other major currencies. The value of the bills in your wallet was backed up by a stockpile of real gold in a vault. Oil is another. It’s valuable, there’s a limited supply and if you have some to sell, somebody’s going to buy it. You don’t even need to stash the barrels in your basement – the markets give you plenty ways to invest your money in oil. The key thing is that you’ve bought something real and you can sell it again, hopefully at a profit. Whatever price you get, though, your asset – gold, oil, palladium, whatever – is real. But derivatives are different.

Derivatives aren’t backed up by real assets. They might be deals about assets that will exist in the future, or contracts based on predictions about the way prices will go – bets, in other words. The futures market is basically just a huge casino, and as the 2008 financial crisis showed it’s such a complex one that when an asset turns out to be worthless nobody can really tell who owns it. Remember all those sub-prime mortgages? Worthless “assets” that had been chopped, mixed up, reformed and sliced like cheap hamburger, then sold all over the world. Nobody who’d bought a package of mortgage debt as an investment knew how much of it was good loans and how much was junk. The result was the whole lot became a toxic product.

Imagine another crisis, another supposed asset being revealed as worthless. Exactly the same will happen again. It’s so complicated that by the time the markets have figured out who owns the good investments and who owns the dreck, confidence in the whole system will have been shaken and fortunes will be lost across the board. And before you start thinking that only affects rich bankers who brought it on themselves, no it doesn’t. The value of every trust fund, every pension scheme, every saving plan for the kids’ college fund, is tied up in this mess of opaque deals.

How big is the problem? It’s huge. Enormous. Too big for words to do it justice. But every single one of those five big banks has at least $40 trillion tied up in derivatives. Between them, in total, the figure is $280 trillion. If those banks go down the economy goes with them. The national debt is bad enough, but this mess is unsustainable. Someone needs to bring some clarity and transparency back into the system before the next disaster strikes.

Why Conservatives Like Gold

gold-bars

With the celebration of its 100th birthday, the Federal Reserve has received a share of criticism from many quarters. In particular, the Conservative or Tea Party republicans are attacking the Fed for a unique reason; they believe it is time to bring back the old gold standard to help the economy thrive in hard money. The Tea Party wants to borrow a leaf from the 19th Century where; all power and wealth was reserved for the top corporate elites like the Wall Street financiers. The age of hard money was often referred to as the age of savage inequality.

Our interview with Richard Stelfox, the CEO of Golden Eagle Coins , a well known gold & silver dealer proved to be quite interesting. “A very high percentage of the customers I talk to on a daily basis claim to be conservative but after a few questions it seems many would lean toward being Libertarian”.  The online gold dealer also has a retail location in the Washington DC area where you can browse rare gold coins, buy silver bars & invest in silver bullion while getting an education on the bullion market from their staff.

(src: www.goldeneaglecoin.com)

The last bond with the precious metal was before 1913 when the Federal Reserve subsequently cut the cord. The last ties with gold were cut in the era of President Nixon in 1971. Despite flexible money being accepted across the board, the conservatives have remained firm in the conviction that gold is the sure way to run an economy. Many personalities have jumped into the bandwagon to advocate for the return of the gold standard. Among others; TV personality Glenn Beck, financial giant Steve Forbes and Tea Party pundit William Kristol have not been shy to air their love for gold publicly.

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