The only ways the price of gold fluctuates are:
1. the futures markets - they gamble on what the price will do and it influences the price, slightly.
2. The value of the dollar compared to the value of other world currencies. If the feds print fewer dollars the the price of gold, in dollars, goes down. If they print more dollars the the price of gold goes up. The actual value of gold is constant - it is the value of the money that changes.
With the Euro in continued crisis and the Yen about to be printed in ship loads the dollar looks favorable. I think that is a big reason why we saw the sell off on Friday - the futures markets look at the dollar as the winner in the current battle of currencies - they are righ t- for now.
I have been following the gold and silver markets pretty closely ever since the first stimulus bill signed by Bush. There was a correction in the price of gold in 2008 where the price dropped something around 20 or 22%. There was another correction in 2009 where it dropped about 14%. Since February this year, gold is off by roughly 20%. The big difference between this correction and the last two is this correction is taking a much longer period of time to play out.
So, to understand what has been going on with gold since early February, we really need to look at it from two different time perspectives - the short-term perspective (less than 30 days) and the medium-term perspective (30 days to one year).
From the short-term, a couple things happened last week that I think put some real selling pressure on gold:
1 - On Wednesday, Goldman Sachs came out with a sell recommendation on gold. There was some technical analysis behind their recommendation, but their fundamental analysis was they (GS) think the U.S. economy is growing and will continue to grow at faster pace. Whether I agree with Goldman or not is immaterial. The fact is that a lot of mutual fund managers and hedge fund managers blindly do whatever Goldman Sachs recommends. That put significant downward pressure on gold prices.
2 - The ECB demands on Cypriot gold is also a big psychological factor driving the prices down. If you look at the other countries in Europe that are in big debt trouble right now, these are the same countries that have a significant percentage of their foreign reserves in gold bullion. Greece, Portugal, Spain, Italy, and France all have over 70% of their foreign reserves in gold. Traders (not investors) are looking at this and thinking these countries are going to have to sell their gold to try to solve their debt problems. So gold traders are trying to "get in front" of these trades. Personally, I do not think the gold from the foreign reserves of countries will ever "hit the gold markets" however. These trades are just too large in terms of volume to ever happen on the open Forex market. The trades, when they happen, will be private back-room affairs between debtor nations and creditor nations directly. (I.E. China will meet the leader in Greece and say "we will give you X for all of the gold you have".) My point is, I think these very large gold trades will have a minimal impact on prices that retail investors and traders pay.
3 - As the price of gold started to slide in early February, and it happened again last Friday, a lot of technical levels were broken very quickly. Automated trading platforms automatically kicked in and issued sell orders. In addition, I am sure there were plenty of margin calls that forced traders to sell into the panic. I expect that some of the technical downward pressure to continue at least through Monday and maybe into Tuesday and Wednesday.
So that is what I think is happened short-term. What is going on in the medium-term that caused gold to crest in February and start a downward slide since?
1 - Japan has decided to print boatloads of Yen. The ECB is busy printing boatloads of Euros to bail out its member nations. Comparing the actions of the Fed against those two, our printing of $85 billion per month seems almost sane. The U.S. Dollar has been gaining strength the last couple months, not because it is good currency, but because it is not as bad as the Euro or the Yen. Strength in in the US. Dollar is going to have a negative effect on the price of gold (even if the Dollar's strength is an illusion).
2 - Ever since the election, all of the opinion pieces in the financial rags have been aping how wonderful the U.S. economy is growing. The DOW has been "breaking records" every other day for the last two months and now the S&P is starting to follow suit. Is this based on the fundamentals of companies inventing new products and selling more widgets? (If it is, I am not seeing it and I expect the folks in the unemployment lines are not either.) So stocks have been on a tear recently, largely due to technical reasons not fundamentals. The money for traders to buy stocks has to come from somewhere; therefore I believe that many traders are selling their gold positions to buy into the stock wave.
In conclusion, I do not think the bottom is falling out of the gold market. I think it is actually the opposite. The economy still stinks on ice. The recent earnings reports are coming in weaker than expected. The recent employment numbers are coming in weaker than expected (and are being revised downward a couple weeks after they come out.) I think what we saw Friday and will likely continue into Monday and Tuesday of next week may very well be the beginnings of a capitulation in the gold markets. Please do your own research, but I think we will start to see the losses in gold flatten out over the next week or two, then it will trade basically flat for a while finally starting a new leg up within 4-6 weeks.
Markets can only move against common sense for so long. There is nothing that has changed from a fundamental point of view with the major world economies in the last 2 years to warrant thinking that we are entering a major growth phase.
I am not a gold buyer. But you have to think about it like this. Cash must be in a bank or invested to grow. Both of those are tracked. No madder what the rules are now they can change them and tax it more, even take it.
Gold you can bury in the back yard it can still grow in value. No paper work no record.
With the socialist hinting they will be finding ways to take more and more and finding new ways to do it. I can see people hiding a share of their hard earn assets in gold.
That creates a slightly different market for gold. One that would be more stable. A market flooded with buyers hoping to turn a fast buck by converting cash to gold and gold to cash is a scary one.
One thing for sure we have some interesting times coming.