July 17, 2024

Ten Reasons Gold Is Not Above $1,000

Gold reached its all time high price above $1,000 per ounce a few days after the shocking Bear Stearns bailout. In the following months gold often experienced sharp declines and has stubbornly refused to reattain the key $1,000 level despite more shocking bailouts, bank failures, and bankruptcies.

Reporters, analysts, and bloggers have cited a variety of reasons why gold has not exploded higher amidst the ongoing turmoil. Some of the reasons are more valid than others, but all are worth examining. Without further ado, the Gold and Silver Blog brings you the Top Ten Reasons Gold Is Not Above $1,000:

1.) Dollar Strength

Against nearly every world currency, the US Dollar has been strengthening. The Dollar’s path higher has accelerated in recent weeks. Gold is thought of as a weak dollar play. With the dollar strengthening, selling gold is simply the other side of the trade.

2.) Commodity Collapse

Since the summer months, commodities have been on the rapid decline. Oil has fallen by more than half from its peak price of $147. Base metals and precious metals have experienced similar if not more drastic declines. While gold has been holding up well on a relative basis, the weakness in commodities may be keeping any price appreciation at bay.

3.) Deleveraging

After years of using excessive leverage in an attempt to maximize returns, firms are rediscovering the notion of risk. Massive deleveraging is taking place as firms sell any asset available to pay down debt. As an asset class, gold is not immune to such sales.

4.) Speculative Selling

With the dollar rallying and gold breaching key technical levels, traders may be taking speculative short positions in gold, anticipating that prices will continue to move lower. This speculative selling compounds the impact of selling taking place for other reasons.

5.) Recession

Fears of a worldwide economic slowdown and deep domestic recession will have a big impact on consumer discretionary purchases. This would likely hold especially true for luxury items such as jewelry.  Since jewelry production is the largest non-investment use for gold, any slowdown would put a drag on demand.

6.) Deflation

While some fear inflation, others fear deflation. If prices decline across the board, some believe that all asset classes will be dragged down, including gold. Notably some people take the exact opposite position about gold and deflation.

7.) Hedge Funds and Mutual Funds

Some people feel that hedge funds had a hand in driving the price of gold from below $300 to above $1,000. Now that fortunes have turned for their other investments, hedge funds are being forced to unmercifully liquidate large positions in gold. Mutual funds are also being forced to liquidate positions in gold to meet redemptions.

8.) “George Costanza Trade”

On Seinfeld, George Costanza realized that every decision he ever made has been wrong. He discovered if he did the exact opposite of what his instincts told him to do, he would be successful. In relation to investing, when everyone believes that a certain trade or investment philosophy is certain to work, oftentimes with uncanny precision the exact opposite happens. This year, a growing number of people began to believe with absolute certainty that gold would move higher. While the opinion was far from universal, was the opinion widespread enough to invoke George Costanza?

9.) Government Manipulation

There is a growing camp which believes that the primary reason that gold has not moved higher in a big way is due to government manipulation. If gold prices skyrocketed, the public at large would lose faith in fiat currencies and start to panic. It would be in the government’s best interests if this did not happen.

10.) These Things Take Time

Some of the forces mentioned above are going head to head with the economic realities that should be driving the price of gold higher. Eventually we will reach a tipping point when demand for physical gold is enough to overwhelm all other factors. Once we reach that point, the price of gold will rise in leaps and bounds.

Gold and Silver News & Headlines

Links to a number of interesting or notable gold and silver news stories or blog posts:

Platinum Almost the Same Price as Gold

Safe haven metal versus industrial metal. Will we reach parity?

Taking delivery of 1 to 5 million ounces a month

A very innovative idea… actually taking delivery of physical silver from the Comex.

Yes, We Have No Silver

Have you recently tried to buy physical silver near its market price? Here is the brief tale of one man’s frustrating quest.

Gold ETF Reaches One Dollar Per Tonne

Even though the price of gold recently experienced a rapid decline, “tonnes in the trust” barely moved. As the author says, “For gold, the price goes down, but investors don’t sell.”

Blog Catalog Verification

The Sale of Safes is Booming


In an interesting sign of the times, the sale of safes has been booming. This story has apparently been making the rounds on some local news programs and last week was the topic of an article in the LA Times.

Safe companies mentioned in the article are reporting sales increases of as much as 50% in the last few weeks. One chiropractor interviewed for the article mentioned that he has recently purchased a fourth safe, which he intends to fill with cash.

Some of the unspoken implications of this recent phenomenon:

  • People are investing in tangible assets like gold and silver instead of intangible assets like stocks and mutual funds. They are also opting for the physical version of the investment rather than certificates, ETFs, or derivatives. The boom in safes is a result of the need to store all of these new assets.
  • People have less trust in banks. They are willing to forgo the nominal rate of interest offered by the bank and keep their cash at home in a safe.
  • People have abandoned belief in safe deposit boxes. In the past, people may have kept tangible assets in a safe deposit box at their bank. Are people growing fearful of bank closures, bank holidays, or a gold seizure?

Here are some semi-hilarious quotes from the LA Times article.

“What people are putting in them I have no idea.”

This comes from a spokeswoman for the company Lowe’s. Not sure why they interviewed Lowe’s to determine what people put in safes, rather than asking the people buying them.

“It’s just stupid.”

This well considered and comprehensive opinion comes from a CPA and Financial Planner. Perhaps some of his clients think his investment advice is stupid. I’ll wait for that interview.

Reaction to: Gold May Pay Only in Case of Maximum Despair

With the price of gold on the decline, flimsy commentaries have started to appear which characterize gold as a fringe bet of foolish people.  I am admittedly biased in the opposite direction writing gold and silver blog, but if I wrote a commentary, I would at least make some substantive arguments that go beyond cursory and reckless statements.

I found this recent commentary written by Jane Bryant Quinn for Bloomberg particularly egregious, so I would like to examine some of her specific points.

“Gold is for rich guys…  you need a lot of it, stored around the world.”

I’m not even sure what she is trying to say here. Why do you need to be rich to buy gold? It can be purchased in sizes as small as 1/10 ounce, which would have cost about $40 in 2001. There is nothing to prevent “poor guys” from owning gold.

Why do you have to store it around the world? A 400 ounce gold bar worth about $288,000 is  7 x 3 5/8 x 1 3/4 inches. This would fit in an average sized safety deposit box. For the “poor guy,” 1/10 ounce of gold is about the size of a dime. You could store it in your pocket if you want.

“Gold isn’t even a reliable hedge against inflation.”

To prove this argument she quotes the price of gold in January 1980 and states that gold has not yet reattained this peak adjusted for inflation. By that same logic, one could state that stocks never have positive returns by quoting the price of the Nasdaq in January of 2000.

“For the average investor, gold boils down to a speculation on higher prices.”

She seems to mention this with a certain distaste. What investment is not based on speculation of higher prices, whether informed, rational, or otherwise? Would you make an investment if you thought prices were going lower?

“Toward the end of each year, [various world mints] let their inventories run down while gearing up for next year’s run. The surge of buyers left them short of high- quality blanks.”

The US Mint has been experiencing problems fulfilling demand for American Silver Eagles since March and problems fulfilling demand for Gold Eagles since August. The problems have been nearly continuous thoughout the year. The reason seems to be that the US Mint cannot obtain sufficient gold and silver on the open market to meet the physical demand.

“On EBay and the Home Shopping Network, coins sell at fantasy prices. A set of Eagles in four different weights was offered on HSN at $4,999.99.”

She lumps eBay into the same category as the Home Shopping Network. The Home Shopping Network is known for overpricing and overpromoting collectible products. EBay is a relatively well informed community of buyers and sellers whose transactions take place in a liquid market.  In general, transactions will occur at whatever price the forces of supply and demand will bear. When you’re favorite bullion dealer runs out of gold, why not purchase it on eBay?

“Gold, by the way, is taxed as a collectible… Your tax rate on long-term capital gains would be 28 percent, compared with 15 percent on other assets. Only a significant price gain redeems your bet. “

The 15 percent tax rate she mentions applies to long term capital gains. If you sold stock which was held for less than one year, it would be taxed at your marginal rate which could be as high as 35 percent. And perhaps more relevant, not too many people have long term capital gains nowadays. If you’ve been investing in stocks or real estate, I think you would welcome a gain taxed at 28% rather than a big pile of losses.