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Why the Gold Price Fell

Commodities / Gold and Silver 2011 Sep 26, 2011 - 10:43 AM GMT

By: Julian_DW_Phillips


In what seemed like just moments, the global markets began to tumble and gain momentum, falling between 5% and 20% so far, and the falls keep coming. No fundamentals have changed, no breaking news shocked the market, but suddenly we are back to 2008, when highly leveraged investors with as little as 10% paid on their positions were wiped out and forced to sell to stop more losses. As computer-imposed, protective stop-loss instructions were triggered, falls accelerated, wiping out investors left, right, and center.

The Technical picture then took on a life of its own, with support level and resistance points gaining total credibility. The damage changed the attitudes of developed world investors cutting down the involvement in highly risky positions, all but eliminating the fly-by-the-seat-of-his-pants investors. An investment 'soberness' kicked in. During the years since 2008, financial markets have taken a different view of risk and such over-leveraged positions have been curtailed. Futures and options markets have raised margins quicker and more decisively than before, limiting such catastrophic losses to a large extent. That does not mean it won't happen; it will, but to a much lesser extent.

Investor Recovery

In 2008 it took nearly 18 months for precious metal prices to rise to new highs. Equity markets recovered but have simply regained former levels at best.

With far greater restraint in the markets now, investor recovery will be faster and more conservative, guarding against holding risky positions for too long. Speculators and Traders will be far faster in closing and opening positions, moving with the market more rather than fighting to make it move. This does not eliminate volatility but it does speed it up and shorten market reactions. In fact, expect greater volatility!

So we ask how long will it take for investors to recover from their losses and re-enter the markets again. That's impossible to say. In the case of the precious metal markets, the question should be, 'how long will it take for the markets to realize the dangers facing the global economy will make the wealth-preserving nature of gold and silver visible to the bulk of global investors." The answer to that question has changed somewhat since 2008.

  • Since then the emergence of the Chinese and other precious metals investor has jumped significantly as the growth of their middle classes has climbed exponentially. These people are savers of up to 40% of their income and of the total income invest around 7% into gold or silver. This fundamental demand facet is new since 2008.

  • In the developed world, the concept of silver and gold as counters against both inflation and deflation have become more accepted.

  • Non-leveraged investors make up the vast bulk of global investors and recognize the signals given by the markets we now see around us. After their strategy meetings, such risks are factored in and portfolio adjustments made. In the current investment climate, such adjustments are quicker to realize the benefits of precious metals and a larger proportion of the portfolios assigned to precious metals. Heavy falls then give their dealers ideal entry points.

  • Once the traders and speculators have enjoyed the froth in the markets, they will back off in the face of real demand. This will allow the prices to 'floor'.

Combine all these factors and you can see that compared to 2008 the time for investment recovery in gold first, then silver, will be a far shorter process than it was in 2008.

Gold Bought in Deflation, by Central Banks

What is more apparent since 2008 is that precious metals are a haven in deflationary days. Gold is both an asset and cash, around the entire globe. In this global environment with worldwide, web-like, banking systems, gold is the one international item that is an asset to all, free from governments. Gold has moved back to the center of the world's monetary system where banks who are finding it difficult to raise loans at reasonable prices, are using gold as collateral to facilitate. Gold is now a viable, monetary asset and no longer a barbarous relic. The demand from emerging nation's central banks in the last two years has confirmed that. Their buying on the dips, when there are fair quantities to be bought, testify to that. This sort of buying is price insensitive, persistent, and likely to be very much alive with a gold price in these regions.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2011 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

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