Gold News

Why the Gold Price Fell

Investment meltdown has pulled the Gold Price down. How...?

IN ALMOST every financial market across the world, investors are asking "What happened?" says Julian Phillips of the GoldForecaster.

In what seemed like just moments, the global bullion markets began to tumble and gained momentum, with the Gold Price falling between 5% and 20% so far – depending on your currency – 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 Gold Investment 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 leveraged 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.

In 2008 it took nearly 18 months for the Gold Price to rise to new highs, going on to reach fresh all-time highs time and again after that. Equity markets in contrast 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.

What is more apparent since 2008 is that precious metals are a haven in deflationary days. Gold Bullion 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.

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JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/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 Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they 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 Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

See full archive of Julian Phillips.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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