There is a massive battle going on between Gold bulls (those expecting the market to rise) and bears (those expecting the market to decline). This is being fought over “fundamental analysis” with key issues: the decline of paper currencies, further QE (UK announced this week and others possible), European debt crisis, ongoing western financial crisis, and the failure of western economies to recover – all bullish factors for gold. Additionally stock markets are again in freefall thereby forcing the sale of gold to raise cash against margin calls (a fundamental bearish factor). Against this many “technical analysis” factors indicate the gold market is now in decline (double top formation done, recent strong decline below 10 and 20 day moving average, short term trend down, major correction) all bearish versus (long term trend still strongly up, above 200 day moving average, the correction being similar to 2008 correction, and not yet near the inflation adjusted top of the 1980′s) all bullish points.
The establishment is clearly pushing the bearish arguments as gold continuing its raging bull run (dramatically up each year over the past 10 years) is problematic for paper currencies and confidence in general. Another factor is that with a lot of “paper” gold out there via Electronic Trade funds (ETF) – many of which DO NOT hold sufficient real gold to meet their obligations – and with futures trading on the Comex exchange, it is possible to depress the price of gold through selective short selling of gold at key junctures. The Americans have also openly admitted that they have funds for “currency stabilisation” work (this can all be done to “paint” the right type of technical analysis picture). So it is an interesting situation. Market manipulation of silver is even easier as the paper market is enormous compared to the amount of real silver out there (but such manipulation cannot last indefinitely).
Ultimately fundamentals win out, although timing is very difficult to predict. Markets do not go up in a straight line so there are always corrections and in the scheme of the strong run up in gold in this and recent years, the 15 or so percent decline in the last couple of weeks for gold is not unusual.
If one feels that the financial crisis is all but over, that western economies are about to rebound strongly, that there is no need for more QE, and other forms of money printing – then one is entitled to feel that gold is finally on its way down. But that is not a prudent view.
Regardless of investment strategy over which way gold is going in the short term we should really look at gold and silver as currency rather than investment commodities. Although the markets and Ben Bernanke will tell you otherwise the key issue for gold is its suitability as a currency and the appalling situation paper money has led us to. The policy makers will do all they can to keep gold from the spotlight as an alternative for paper money. To lose paper money means to lose central banker/government control over monetary policy and the get out clause of printing money to devalue national currencies. They can hide a lot of economic mismanagement behind the veneer of a currency for which they hold the keys to the printing presses. Whereas gold and silver require old fashioned work and effort.
For the public at large gold and silver represent a safe haven in a sea of insecurity and doubt. It’s a shame that today’s governments are depriving their populations of the stability it lends as the currency of choice.
Jamal Harwood is a regular contributor to New Civilisation. He is a lecturer in Finance, and a member of the UK Executive Committee of Hizb ut-Tahrir Britain.