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Entrepreneur58 (37.66)

What would make gold go down?



April 25, 2009 – Comments (7)

I was a bear on gold during the 80s and 90s and I turned bullish in 2001.  I'm still a bull, but I like to think about the bear case, so here goes.

Gold is very tax efficient, so higher tax rates make gold go up and lower rates make gold go down.  No reason here to worry since all governments all over the world are spending like crazy.  Lower taxes would be most unlikley.

Gold pays no interest, so higher interest rates on government bonds can make gold go down.  I can't see interest rates going up during a woldwide financial collapse.  If they do, the economy is going to do some serious contracting. 

New mining technologies could make gold recovery easier, thus increasing production and causing the price to fall.  This happened during the last century with heap leaching.  Right now gold production doesn't seem to be going up very fast despite the high price and I don't know of any new technologies on the horizon.  Correct me if I'm wrong.

Gold is always a bet against the US Federal Reserve.  If the Fed has things under control and they have a growing economy with low inflation, its a killer for gold.  Obviously, things haven't been going the Fed's way recently, but you never know.  They may start getting the credit bubble reflating with all the stimulus spending.  The problem is that this stimulus is unsustainable (you can't run $2 trillion dollar deficits every year - something has to give sooner or later), so eventually, you get an even bigger crash later on.  This could be the biggest problem for gold over the short term.  Long term, I still don't see much chance for a sustainable recovery any time soon.

The other possibility is that other things are a better investment.  This is a difficult thing to know for sure.  Most people who own gold own it as an insurance policy against systemic collapse.  It is not something they are in a hurry to sell if something marginally better comes along.  I would be happy to sell gold and go into other assets if the price of those other assets was right.  Unfortunately, the Fed stimulus program is keeping the zombie banks just alive enough to prevent them from dumping their assets on the market at attractive prices.  When those attractive prices come along, I'll be ready.  During the Great Depression you could find unbelievable bargains.  Where are the bargains?  For now the zombies rule.

Please let me know if you think of anything else that could make gold go down, and good luck with your investing.


7 Comments – Post Your Own

#1) On April 25, 2009 at 4:32 PM, minduza (< 20) wrote:

Central banks don't want to see gold above 1000$, so they are doing all they can to avoid it. You saw they power with silver last year when it went down 50% in matter of days because of some banks shorting it. So the price can be manipulated. The questions is for how long?

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#2) On April 25, 2009 at 4:53 PM, catoismymotor (< 20) wrote:

The law of supply and demand is the only thing I can think of. You raise a great question. I am eager to learn the answer as well.

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#3) On April 25, 2009 at 4:57 PM, OctoStalin (33.41) wrote:

A slight improvment in the economy, which is inevitable over the long term.

Gold prices have tripled, yet demand has not. The value of gold is determined by spectulators not users. Gold is not a super safe hedge, at current levels it's highly spectulative and has little upside.

For lack of a better word, phail. 








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#4) On April 25, 2009 at 5:16 PM, goldminingXpert (28.83) wrote:

nice thoughtful post in an arena full of mindless comments. Gold/silver ratio and gold/oil ratio are a good consideration. Either oil & silver are far undervalued or gold is overvalued. I think gold is too expensive versus other commodities particularly natural gas.

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#5) On April 25, 2009 at 5:47 PM, JeanDavid (77.64) wrote:

I think the main reason that gold goes down these days is that major players (e.g., governments, or their agents: the largest banks) are shorting it to keep its price down. These players do not want people to lose their trust in paper money, so they do their best to keep gold (and silver) down.

However, they cannot do it indefinitely. They have to be able to borrow the stuff to short it unless  they are prepared to take the enormous risk of naked shorting it. Some of this takes place, but these days only a government, or someone with government backing, would dare do it.

Recently, they have been doing another trick: they have the IMF threaten to sell a lot of it to meet their current expenses. That pushes gold down. THen the IMF does not sell. THey have played this wolf game a few times now. Each time, the market is less impressed.

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#6) On April 25, 2009 at 7:15 PM, Bupp (28.00) wrote:

gold is not an investment it is speculation.  Gold miners on the other hand...

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#7) On April 25, 2009 at 8:14 PM, walt373 (99.87) wrote:

I believe knowing the "right" price for gold is too hard to say for me to put money in it. For a hedge against inflation or dollar collapse, I would rather buy TIPS or foreign currencies/assets.

The biggest difference between gold and other investments is that it doesn't throw off cash. According to John Bogle, an asset can provide you with two sources of returns - speculative returns and investment returns. If stocks and bonds are undervalued, the companies and in turn you, still receive the same cash flow, so the investment return does not change, even if nobody wants to buy them. This is what investors should focus on because they don't have to play the psychology game. Gold returns, on the other hand, comes 100% from speculative returns.

Not only this, but gold doesn't have much real use. It is just for trading. The price could go to $1 or all the gold in the world could disappear and it wouldn't really make that much difference to most people. This makes the demand far more elastic than other commodities, which will continue to be in demand to some extent no matter what happens to the economy or the mood of its speculators.

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