Why Are Gold and Silver Falling?
Aug 12th, 2008 | By Gary North | Category: Gold MarketOn August 11, the price of gold collapsed: down over $30. So did the price of silver, platinum, and palladium. A lot of people are asking why.
On my site’s page on gold’s daily price, I make available a five-day chart of gold’s price. On that page, you will find my commentary on gold. Beginning on the 18th of March, and posted on the 19th, I wrote that I believed gold had probably entered a bear market. That call looked as though it was way too premature, since gold’s intra-day high had been $1,037 on March 17. In the very early morning of March 17, I ran an article on my site on how to short gold to protect your position in coins.
Here is what I posted on my gold price page. If you have visited my page, you should recall this.
I think gold has entered a bear market. I posted this article on March 19, 2008:
http://www.garynorth.com/
The offsetting factor is fear of war with Iran. See my Department: War With Iran.
http://www.garynorth.com/
Just for the historical record, here is what I wrote on March 18 and published on March 19.
Gold could fall. I expect it to fall. So, you may pay a price for owning gold coins. I expect to.
If you are not willing to pay the price, you should sell all or part of them, or short gold bullion to compensate you for the loss. In short, count the cost. This is a universal rule (Luke 14:28-30).
I think the precious metals are a bubble market today. It is ending. Here is a crucial sign that it is ending. India is not buying. When Indians stop buying gold, they must be replaced by new buyers. Who might they be?
. . .One day’s move should not be regarded as a definitive turning point — not after a seven-year run. But there are signs that the run is over for now. It is time to think about recession and even price deflation. As I have said for months, the FED is deflating. We should expect prices to follow.
Silver and platinum also fell on March 18. They are moving together in lock-step, up and down, yet the economic fundamentals for the three are completely different. So, something is driving them that cuts across individual markets. But what? I think it is the last of Greenspan’s bubbles: the commodity bubble. I think the bubble is about to end.
But what about oil? Yes, even oil. But the rate of declining price will be less than with other industrial commodities. I think this will also be true of gold.
I believe in the Austrian School’s theory of money, including the business cycle. I have written a short book on this. I am not so committed to a position proclaiming the ever-rising price of gold that I am willing to abandon Mises’ theory of the boom-bust cycle in order to hold such a position.
Gold is ideal for Mises’ inflationary crack-up boom, although not as good as a home with a garden in the country and a few thousand gallons of diesel. This is not the crack-up boom. There has to be monetary inflation for a crack-up boom to occur. Today, there isn’t any.
If you wonder how I came to this conclusion, read my mini-book, “Mises on Money,” which is posted on Lew Rockwell’s site.
http://www.Lewrockwell.com/
I was convinced on March 18 that the recession caused by the Federal Reserve’s relatively tight money policy would lead to a fall in the price of all commodities, especially the precious metals. I believed that the commodity market was the last of the bubble markets. The real estate market popped in 2006, and had continued downward. I was convinced that the last market of Greenspan’s bubble economy was the commodities market.
Investors go from market to market, trying to find the next market that is going to boom. This chase proves to be futile. They chase bubble markets; they get killed by bubble markets. I was convinced that commodities were going to fall, and that this was the end of the road for the bubble markets.
In July, the commodities market did begin to fall. I think this publicly marked the end of the commodity bubble. One thing could bring it back: war with Iran. That would be disastrous internationally, and it will push the price of oil and the
precious metals much higher. It was the threat of war with Iran that kept gold above $900 — not monetary policy, not the fundamentals of the market, not technical indicators, and not any of the other meaningless statistical indicators that are used by defenders of a bubble market to persuade investors that the market is anything except a bubble market.
You will no doubt see lots of reports on this or that indicator that shows that the correction in gold and silver and
platinum and palladium and copper and zinc and all the other metals is temporary. I don’t think it is temporary.
I still worry about war in Iran. I don’t think people should ever discount too heavily the idiocy of governments regarding war. The absolute stupidity of the President of Georgia in launching a military invasion of the Russian-dominated province of South Ossetia last Friday is indicative of what rulers do without counting the cost of their actions. This is normal. So, while the fall in prices of oil and the precious metals has given me some confidence that neither United States nor the State of Israel will launch a pre-emptory strike against Iran in the near future, I am certainly not willing to bet all of my money, including gold, on this assumption.
Nevertheless, I have been public in my warning since the middle of March that I believed that the bull market in gold and silver has ended. If we are talking economic fundamentals, gold and silver have had their big run. From now on and for months ahead, the pressure will be downward.
Advertisement
The new Debt-Free Index CD is comprised of equal parts Singapore dollar, Japanese yen, Swiss franc, Australian dollar and Brazilian real. Why these currencies? All 5 economies have a strong balance of payments—a factor that could aid performance against the U.S. dollar.
Of the 5 economies, only Australia has a trade deficit—and the gap appears to be narrowing. Concerned about investing in a weak U.S. dollar? Consider this new Index CD, it is available in 3- and 6-month terms with a $20,000 minimum deposit. Apply today here
This CD is FDIC insured against bank insolvency, but please keep in mind that you could lose principal as a result of currency fluctuation.
Gary North, at the age of 25, was the youngest elected member of the Economists' National Committee on Monetary Policy. He has served as a senior staff member of the Foundation for Economic Education and as a research assistant to U.S. Congressman Ron Paul.
I do agree with most of what Mr. North says; however I have seen research that show the money supply has been growing at a double digit rate (using an esimate for M3), not the low single digits Mr. North claims. Also, I think a war with Iran is more than likely to occur, meaning in fact gold and other commodities would shoot through the roof. Mr. North does allow for this possibility, but since it in my mind has a good chance of happening, it stands to reason gold et al prices have a good chance of rising significantly. All other things being equal, yes, gold could go down, but it most likely will not.
Gold may indeed be entering a bear market. Too bad I just bought some gold stock a couple of months ago.
Gold may be dropping in price again, but it will of course, inevitably go past $1000. an ounce. The time line is uncertain,but according to J. Sinclair, gold will reach $1200. by December & up to $1600. by January.