Silver, platinum, palladium, copper, aluminum, crude oil, and other commodities joined ranks with gold when its price took a nose-dive on April 15.
Precious metal analysts suggest that the drop in price of a number of metal commodities is an overreaction to the drop in gold price.
“Perhaps the most vulnerable commodity of all is gold, which has no supply-and-demand mechanisms to help establish a fair value,” an April 16 article on the StreetAuthority website states.
According to a historical chart published on the Kitco website, gold, without warning, plummeted far below $1,500, reaching $1,395 by the evening of April 15, and continued its downward trend the next day to $1,380. On April 17, gold began to move up a smidgen, reaching $1,392.
Silver dropped from $27.4 on April 12 to $23.5 by April 15. Platinum fell from $1,514 to $1,448, and palladium dropped from $715.5 to $676.
The StreetAuthority article suggests that unless the market stabilizes, commodity prices might drop even further, but that reaction would be governed by the economic theory of supply and demand.
Citing Credit Suisse Group, an April 3 article on the Yahoo Finance website stated, “Softer-than-expected demand for commodities has brought the attention back to supply growth.”
Rationalizing the Plunge
The recent nose-dive in gold prices has to be looked at from different angles, given that various precious metal experts and market analysts try to convince readers that their particular theories are sound.
An April 16 article by Riverbend Investment Management suggests that gold investors are getting cold feet, expecting the U.S. Federal Reserve to change its monetary policies.
Then, when the gold price plunged significantly, portfolios containing gold investments were losing value, and thus hedge fund managers liquidated these funds.
Pointing to eurozone problems, Riverbend suggests that European countries with a high debt problem, such as Italy, might sell their gold holdings. Also, false rumors that Cyprus was told to sell 400 million euros worth of its gold holdings to raise funds were circulating, pushing a panic button for a number of gold investors.
A large sale of gold holdings would increase the gold supply in the market, putting a downward pressure on the price.
GMO, a global investment management firm, suggests in an April report that people in emerging markets, such as India, have invested in gold over the past 13 years, driving the price up. However, with economic growth slowing down, buying gold could also slow down.
“Gold prices are driven both by global monetary policy and emerging markets consumers,” the GMO report states.
According to an April 17 article on the Kitco website, the decline in the price of gold could indicate a slowing down of global growth. This reasoning gained importance when the International Monetary Fund recently lowered its global growth forecast by 0.2 percent to 3.3 percent.
“Since there are no fundamental economic reasons to justify the gold bubble bust, we propose that the price of gold is currently in a correction, potentially caused by the technical breakdown, and a likely liquidating position by a hedge fund due to the margin call,” an April 15 article on the Seeking Alpha website suggests.
Blame Game
Reports of gold price manipulation by investment management firms and banks, such as Goldman Sachs Group Inc., JPMorgan Chase & Co., and the Pacific Investment Management Co. LLC, have hit the airwaves.
These firms are very adept at having the media tell the world they are expecting a downturn in the price of gold, stocks, or any other commodity. The intended reader will then either buy or sell, depending on the information coming out of these firms.
For example, according to an April 11 article on the Money Morning website, Goldman issued a report in February, stating that gold was on a downward slide. Then on April 10, Goldman stated that gold would fall to $1,530 by mid-July, $1,490 by mid-October, and $1,390 within a year.
The Money Morning article states, “The double whammy—two downgrades in two months—had its intended effect, as gold prices fell 2%, to $1,558.80, after Goldman released its report.”
The Market Oracle website states in an April 18 article that according to the U.S. Mint, 2 tons of gold were sold on April 17. Without providing names, Market Oracle suggests, “Manipulative selling by a large hedge fund or bullion bank may have ignited a mini gold rush globally.”
The U.S. Commodity Futures Trading Commission is investigating whether certain London banks involved in setting the spot price for gold are manipulating the gold price, according to the Market Oracle article.
Reversing the Trend
The world’s central banks could stop the gold market sell-off by continuing to buy gold, stabilizing the price of gold.
A Feb. 14 World Gold Council report states that central banks bought 17 percent more gold in 2012 when compared to 2011.
Six of the world’s central banks—Russia, Turkey, South Korea, Brazil, Kazakhstan, and Iraq—increased their gold holdings during either 2012 or 2013, according to an April 16 article on the 24/7 Wall St website.
“Central banks buy gold in support of their currencies, and the recent massive drop may give the central banks that can a chance to increase their gold holdings,” the 24/7 article suggests.
It is not certain if gold prices will rise again or sink further in the near future. Investigation into the cause of the significant drop in gold prices is ongoing and any outcome could settle the question of the legitimacy of the decline in gold prices.
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