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Gold price drops – do we care?

Commodities / Gold and Silver 2012 Mar 02, 2012 - 08:15 AM GMT

By: Jan_Skoyles


Best Financial Markets Analysis ArticleOn Wednesday we sat helpless as we watched the gold price plummet from $1790 to a low of $1696, whilst the silver price followed suit falling by $3.94 from $37.00.

Have the gold naysayers been proven right? Have Warren Buffet’s latest comments rung true to the market?

Many are commenting on the reasons for gold and silver’s fall in price yesterday.

Reports of bullion banks manipulating the market in cahoots with the powers that be in an attempt to pull back the price have been circulating in gold bull circles. As Zerohedge reported, the aggressive drop in price came as the market saw huge sell orders, from large institutional sources who were not necessarily operating on the basis of profit maximisation, ‘One trader said how he had not seen that sort of volume before and the activity was akin to “computerised manipulation” and that there were “massive volumes going through and appeared as if some large entities had bids and offers at the same price”.’

For others, Bernanke’s testimony to the House Financial Services Committee was clear indication that the Federal Reserve was feeling bullish about the health of the US economy and had little reason to implement more QE. His comments in regard to the oil price, that it is ‘…likely to push up inflation temporarily while reducing consumers’ purchasing power,’ may also have caused concern as to whether he will stand by his earlier statements of not raising interest rates until 2014.

Does it matter if Bernanke thinks that the economy is looking slightly healthier than he did last time he spoke?

Does it matter if there has been a secret liquidity push?

Even if either reason for the price drop is true or not does it really matter for those interested in gold investment?

Despite yesterday’s drop, gold remains up 9% and silver 23.5% on the year to date. Several times we have been warned that there will be a few ‘corrections’ in the gold price before it can head on to new highs, and with each correction the gold price remains a little more buoyant. Bull markets are characterized by retracements such as these, what will be interesting now is how quickly the gold price will recover.

Those who are already interested in getting out of paper assets  and into precious metals should, and will, take advantage of this short-term low price. The fundamental reasons to own gold and silver are still in place and are stronger than ever. Whilst much commented on fundamentals such as inflation and central bank behaviour are still very much relevant, a few events have almost testified to the fact that owning gold and silver are still vital.

Bullish on Silver

India is somewhere we frequently comment on due to their intrinsic love of gold and silver. Yesterday whilst markets were in free-fall elsewhere, silver climbed to a 7 month high in India. Reports state that silver buying has been growing recently on the back of the climbing silver price. Despite yesterday’s drop on the international markets it seems India buyers remain bullish.

This is interesting considering India’s economy felt a bit of a battering towards the second half of 2011; interest rates increased, the stock market suffered and the Rupee fell significantly. Perhaps rising gold prices were too much for Indian consumers, instead they turned to the next best thing, silver.

Eurozone saga continues

A record number of European banks, 800 to be precise, borrowed money as part of the ECB’s LTRO yesterday, compared with the 523 banks who borrowed in the last LTRO back in December. This does not sound like a situation which is improving in any sense of the word. Banks, central banks and governments in the West have worked extremely hard to debauch their currencies; this new step has merely spurred on the race to end the fiat money system.

If banks are still rushing to borrow money, then maybe one should be worried about the money which you’ve deposited with them.

The MF Global collapse should be evidence enough that risk remains high in the financial markets, making gold and silver ownership, an investment position free from contract void of counterparty risk, a more attractive prospect.

Meanwhile efforts to save the Eurozone’s countries, let alone banks, are proving fruitless. Figures from Greece today showed the economy is in its worst position since the crisis struck. Reuters reported, ‘Greek manufacturing shrank at its fastest rate in at least thirteen years in February as production and new orders declined at record rates, driving the sector deeper into recession and forcing firms to shed more jobs, a survey showed on Thursday.’

Gold as a medium of exchange

As we reported recently, Iran is now accepting gold payments. This was further confirmed on Tuesday when Mahmoud Bahmani, governor of Iran’s central bank, said the country was ready to accept gold as payment for oil. In fear of repeating ourselves this move is most likely not just down to recent EU and US sanctions. It is also likely to be down to the fact that the US Dollar, the international reserve currency, is continually being debased and slowly other countries are losing faith in it.

Along with Iran, Russia and China’s central banks embracing gold, we continue to see record amounts of gold buying from other central banks. Earlier this month we briefly discussed the World Gold Council’s latest report which showed Central Banks’ gold buying activity was up 571%, making them net buyers of gold.

Ignore the price

Yes it is bad that the gold and silver market may be manipulated, and investors should celebrate the  work of GATA. However for investors still considering whether or not to buy precious metals they should bear in mind the reasons to own gold are still there, in fact this behaviour shows that they are stronger than ever.

In one sense yes, the power and desire of central banks and governments to manipulate the gold price is almost frightening. It is also tempting to think Bernanke was right, things are improving. But as Mises once said ‘Governments cannot free themselves from the pressure of public opinion. They cannot rebel against the preponderance of generally accepted ideologies, however fallacious.’

Whilst it is always nice to see the price of gold go up, short and medium-term price movements are fairly irrelevant. You should try to ignore them and remember that you hold gold and silver for your own wealth protection and insurance against both monetary and political shocks.

Protect yourself from bankers and politicians. Buy gold bullion safely and securely with The Real Asset Company.

Jan Skoyles contributes to the The Real Asset Co research desk. Jan has recently graduated with a First in International Business and Economics. In her final year she developed a keen interest in Austrian economics, Libertarianism and particularly precious metals.  

The Real Asset Co. is a secure and efficient way to invest precious metals. Clients typically use our platform to build a long position and are using gold and silver bullion as a savings mechanism in the face on currency debasement and devaluations. The Real Asset Co. holds a distinctly Austrian world view and was launched to help savers and investors secure and protect their wealth and purchasing power.

© 2012 Copyright Jan Skoyles - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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