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Analyzing Gold's Decline
 | By Patrick A. Heller, Market Update
August 12, 2008 |
Since July 15, the price of gold has declined well over 15 percent.
Why?
It certainly has not happened because the economic news has been especially rosy.
In fact, the financial news has been pretty much horrible:
- Banks at best have reported sharply lower earnings and many have reported massive losses. On balance, other companies have also performed poorly.
- One report projects that over 10 percent of U.S. businesses will go bankrupt in the next 12 months.
- At least four U.S. banks failed in the past month after only three banks failed for the entire three-year period 2005-2007.
- The St. Louis Federal Reserve released a report showing that emergency borrowings by banks from the Federal Reserve jumped from less than $10 billion to more than $170 billion this year.
- Last week, Citigroup agreed to bail out customers holding $7 billion in auction-rate securities plus pay fines of $100 million, the first settlement of lawsuits in this seized-up $330 billion niche market.
- Unemployment rose again in July. Even the Bureau of Labor Statistics now acknowledges that their U-6 definition of unemployment in the U.S. exceeds 10 percent.
- By two different government reports, recent inflation numbers are at their highest levels in many years.
- President Bush announced that the next year's federal budget deficit will set an all-time record.
Perhaps the most important event may turn out to be Georgia's invasion of two of its breakaway regions last Friday. This former Soviet state and U.S. political ally almost certainly communicated this information to the U.S. government before the attack began. In response, Russia has invaded Georgia.
There are two key elements to this warmongering. First, a one million barrel per day oil pipeline runs through Georgia, which supplies Europe and the U.S. If that were shut down, there would be an immediate oil supply squeeze. Second, Russia's Putin is taking a calculated risk that the U.S. is so tied up militarily in Iraq and Afghanistan that it will lack the will and capability to support Georgia. It is even possible that Russia has attacked Georgia as a means to reduce the threat of a near-term military attack against Iran. Remember that World War I grew out of an assassination in Serbia, a relatively small country, and that World War II could be said to be an outgrowth over the Spanish Civil War in the mid-to-late 1930s. If the conflict in Georgia expands, look for commodity prices to soar within days.
One supposed bright spot of economic news is that home sales jumped 5 percent in July over the year before. Unfortunately, if you dig underneath the numbers (and I have not seen this information yet), expect to find that the increase in the number of units sold happened because of the rise in sale of foreclosed properties being dumped at low prices.
With all this bad news, the value of the U.S. dollar ought to be falling. Instead, it has climbed to a multi-month high against a basket of other world currencies.
The price of gold has not been hurt with an outpouring of positive economic news. So, just what is going on to knock down the price of gold in the past few weeks?
Data is starting to come out to show that there has been massive intervention by governments around the world to support the U.S. dollar and also knock down gold and other precious metals prices:
- In the past four weeks, foreign central banks have bought so many U.S. dollars that their holdings of U.S. government debt has increased by more than 2 percent.
- In the week ending July 25, the central banks in the euro monetary system sold almost a million ounces of gold after a steady stream of weekly sales of less than a hundred thousand ounces per week.
- There have been some spikes in gold lease rates, such as on July 30 and Aug. 1, indicating that "someone" is borrowing a significant quantity of gold in order to sell it on the physical market.
The U.S. dollar did not rise and gold did not drop because of any change in the fundamental factors that determine their long-term value. Instead, this large coordinated short-term onslaught is likely to be over soon (with this Monday's salvos perhaps being the final major blow). Once we get past this major intervention, then I expect the dollar to resume its long-term decline and for gold to soar to new record levels.
The current financial offensive to support the U.S. dollar and stock market, and knock down the prices of gold and silver, has been so effective that it has scared a number of newer gold investors into selling (and thereby putting even more downward pressure on gold prices). These "weak-hands" owners will take their time about considering gold ownership again.
On the other hand, imports of gold by India have soared in the past two weeks to their highest levels in a year. Not only is demand strong, but the prices being paid in India are also at their highest premium in years over the world gold spot price. For many years, India has been the world's largest gold consuming nation, until displaced by Vietnam early this year. In years past, a surge in gold demand from India proved to be a good indicator of a market bottom.
It may take up to three months for the price of gold to recover from the recent government intervention, but enjoy these current lower prices as a temporary bargain opportunity.
Patrick A. Heller is coin dealer and author of the newsletter Liberty's Outlook. See www.libertycoinservice.com.
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