Everything You Need to Know About Gold Prices

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Gold's hot. Then it's not. Now what?

Where did the love for the shiny metal go?

Now the gold bugs are crying, and the "I told you so crowd" is warming up in the wings.

After a stunning rally to $1,895/oz., gold prices are down hard, falling below $1,600/oz. That's a 16.11% drop that has the gold bears drooling for more-but probably not for long.

Let's start with gold prices themselves. Right now they're down three months in a row and many gold investors fear there's no bottom in sight.

What they don't realize is that the fall in gold prices is as rare as proverbial hen's teeth. This is the first time we've seen gold prices tumble three months in a row since March of 2001.

In fact, since 1957 we've only seen gold prices fall three months in a row 65 times out of a total of 661 three-month periods, according to data compiled by Bloomberg and Standard and Poor's.

But here's the thing about gold prices…

Gold could fall all the way through May, turning what it already a rare occurrence into an ultra-rare occurrence.

Would that be a bad thing? In the bigger scheme of things, not really.

People forget that gold prices fell by more than half from 1975 to 1976, and were down 17 out of 24 months. At the same time, gold prices also recorded 10 three-month declines during the period.

That was, incidentally, right before gold rose 721.25% to $850.00/oz.– a peak gold hit on January 21, 1980.

The point is, bear tracks always precede bull market runs. So I am not especially concerned by this pullback in gold.

In fact, as you can see from an earlier forecast, we're right on target with my expectations for gold this year.

Take a look at what I shared with my readers on January 2, 2012:

The drop in prices we're seeing is simply a matter of traders adjusting their risk tolerance by taking money off the table. They are moving out of gold and into dollars.

Gold Prices Are Driven by the "Smart Money"

Not surprisingly, Greece is the biggest single factor behind the move. Traders are concerned that the nation will summarily go its own way, shatter the EU's bailout and potentially sink the euro itself.

Next week the worries may be something entirely different. You just never know how these events are going to unfold in the short term. I sure don't.

I believe gold prices will fall further. Traders still haven't totally priced in the costs of an EU flameout, nor have they begun to liquidate positions to raise the necessary capital to meet redemption requests you just know are waiting in the wings.

Don't forget that gold is now a marginable asset. It is also one of the most liquid assets on the planet if you factor in derivatives like futures and options – many of which form the basis for sophisticated stock trading models because they indirectly dictate the amount of risk a trader can or cannot take.

In other words, gold is driven by "smart money" – meaning those with the scope and scale to move markets — even if it's not all that smart.

As Western currencies decline and emerging economies continue to "buy" value outside the U.S. dollar, international demand for physical gold is more likely to increase than decrease.

China is the most aggressive of these foreign buyers, accumulating an average of 45 more tons per month over the last eight months than the prior eight, according to Eric Sprott, CEO of Sprott Asset Management.

You can guess what kind of effect this is going to have on gold prices as easily as I can.

Other nations have a more indirect impact. Iran, for example, is planning to sell oil to China for gold as U.S. sanctions take effect. Brazil and Russia are both hinting at a move towards some sort of physically-backed currency basket in lieu of the dollar as an international backbone. And India recently retracted a gold tax that paves the way for broader gold ownership.

Just as it is with other forms of investments, capital is shifting from the nanny states of the West to the growth-backed economies of the Far East.

The sovereign debt crisis still burning in Europe will only accelerate this process, especially as major financial hubs transition trading activity to emerging and newly regulated exchanges like Shanghai.

Then there's France and newly elected President Francois Hollande, whose tax-and-spend policies are perhaps the biggest single potential influence on gold prices on the planet at the moment.

Think about it.

The EU is going up in flames and Hollande wants absolutely nothing to do with austerity. In fact, he's likely to abandon it entirely. That speaks to more stimulus and more bailouts.

European central bankers suggest this is necessary to drive growth. But last time I looked this was political speak for "imprimer de l'argent," or printing money.

And printing money by its very definition is inflationary.

Don't Lose Your Love for Gold

That means institutions and individuals alike are going to be looking for hard assets as a means of preserving their wealth. Once the headlines die down they will again turn to gold.

"So do I buy in?"

I get that question all the time and my answer remains the same. It depends on your expectations and your time frame:

  • If you're a short-term trader prone to timing-based decisions, I advocate buying into weakness over a period of months, especially now that gold has broken under $1,600 for the first time since December 30th and we've seen the first close under $1,600 this year. If it busts $1,500/oz., backing up the truck for gold is probably a pretty good idea. At $1,300 it's time to load up.
  • If you believe, like I do, that global demand will ultimately override short-term gyrations, making measured investments is the way to go in the meantime. That could include, for instance, increasing allocations to bullion, gold certificates, coins or ETFs as the price drops. Just as you want to sell into strength, you want to buy into weakness, especially when so many people are looking the other way.

At the end of the day, there's no rocket science to this.

The gold industry produces just 2,500-2,800 tons a year, depending on various data sources. Eric Sprott notes that if you take China and Russia out of the picture by removing the 500 or so tons they produce, it leaves approximately 2,200 tons for the rest of the market.

And I agree.

Imagine what happens when somebody wants an extra 500 tons. It's highly unlikely they'll be able to buy it without moving prices…higher.

[Editor's Note: Keith's Geiger Index continues to deliver for his subscribers. The track record on this one is amazing. Since inception, 64 of his 67 recommendations have been winners.

And looking at the big picture here, things are just getting started...

Once you see Keith's "secret weapon," you'll understand why. To learn more about the Geiger Index click here.]

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Yukon c. | May 11, 2012

    I constantly read articles about PM's. I've learned that you can never really understand what is really going on. I've made some good bets and some bad bets. The country inflates its money now it deflates my money by lowering commodities. The purchase power of America is becoming week. I can't see the light at the end of the tunnel. But I can see more problems that are being pulled over Americans eyes. The media wants us to think things are good in America. Come on! We have states that can't afford to pave roads, you got pot holes all over the stl. I bet you politicians driveways are paved with zero pot holes. Healthcare is terrible, unaffordable, and not quality. It's cost me $30 every two weeks for myself. If I ad my son it $275 every two weeks. As this country keeps deflating, there will be zero capital to help these savages from building empires. The common man has no direction cause whatever way they go. The govt wants a piece of my American pie.

  2. fallingman | May 11, 2012

    Good article.

    I'm not sure what people were looking for after that huge runup, but everything is unfolding about as one would expect. This pullback is a gift. I'd love to see $1421. The only question is how low is low enough? Averaging in makes sense.

    Thanks.

  3. H Craig Bradley | May 11, 2012

    SMART MONEY vs. SMART INDIVIDUALS

    The smart money analogy seems very appropriate here. Take Facebook, an immature and unseasoned company with a young and inexperienced CEO who is said to be "the Next Steve Jobs" Really? The company has revenue problems, as well, yet institutional investors are falling over each other to get this IPO ( its oversubscribed). Of course, Warren Buffet is NOT in.

    Now, look at gold. What do you see. A global market driven by large institutions, whole sovereign countries, and central banks. All "big boys". Thus, the market movers in gold are a small band (clique) of international players who probably don't react quite the same as the individual investors. So, try to outsmart them with long hold periods (10 years) and as Keith said: " Buy the dips". Warren Buffet would only buy-in at a known discount. If you don't know, don't buy!

  4. Owen K. | May 11, 2012

    Respectfully, you are ignoring the efforts by the International Banking Cartel to manipulate the price of Gold to the downside. Reason: To preserve and protect the fiat currency system which is the source of their power. My source: GATA reports. There is a gold price manipulation scheme. It is real. Check out these reports for yourselves. You can find them at the GATA website.

  5. H. D Hawkins | May 11, 2012

    You could make a good case for sustained 900-1100 oz gold just by looking in the rear view mirror at yr 1980.There were thousands of 250 oz silver and 3000 oz gold near side predictions when gold slid to a 680 oz "correction". 3.2 decades later the overlaid graphs look the same, comparing peak to peak and "correction" to "correction". Stackers are hovering, anticipating the long awaited spike to pierce the clouds-just like in yr 1980. Prospector silver rounds have vanished and have been replaced by Eagles- and they will probably be replaced by something else, further down the road. Looks like a settling Ag at 13.50 to 19.00 and Au at 950.00 after the carrot chasing June/July spike fizzles out-just like in the early eighties.

  6. JJM | May 11, 2012

    I'm more into Silver and have been acquiring physical for only the past 1.5 years at costs anywhere from $28 to $40. Although today's price is near that which I started, there is no way I would bail out. Despite continual manipulation and trade of unsupported paper ounces, I do believe that in 5 or 10 years, 2 oz will still buy me the same week's worth of food. Thinking 'Long Term Wealth Preservation' and barter material.

  7. Richard Komperda | May 12, 2012

    Where is the rest of the article on Low Float Stocks, this link was supposed to contain the rest of the article

  8. Rich | May 13, 2012

    Did you know that with all the gold we know off and in the mines that we know off today that there is not enough gold to give every person in the world one small ounce. there is no limit as to what gold will be even in the near future.

  9. freddy lim | May 13, 2012

    GOLD'LL ALWAYS BE IMPORTANT REGARDLESS OF PRICES AS IT'S USED IN OUR COMPUTERS AT LEAST!

  10. H Craig Bradley | May 15, 2012

    GOLD FEVER

    On an individual level, buying non-circulated proof gold coins in one troy ounce denominations or less (22K) is not as profitable in the short term if you consider taxes, expenses and premiums.
    Lets look at the Taxes first, not last, least anyone catch "Gold Fever".

    Spot Market Price of Gold: $1544/troy ounce (P.M. 5/15/2012)

    1) 14% premium above spot for a 1-ounce of gold Canadian Maple Leaf Coin: $216.00

    2) $772 (gain if gold were to go up by 50% to $2300/ounce this year due to China loading up)/ 28% ( current Federal tax rate on collectibles): $216.0

    3) State Income Tax (top rate) for Oregon or Calif.: 10% X $772= $77.0

    4) 5% fee to convert gold coin back to U.S. Dollars: $2300 X .05= $115.0

    Total Taxes (State and Federal), Fees, and Transaction Costs associated with a gain of 60% from todays gold spot price of $1544/ounce

    $216+$216+$77+$115=$624.00

    $772-$624=$148 net (19% gain of $772 price gain of 50%), after taxes
    (profit expressed in real dollars). Not a bad return if you can make it in 12 months or less.

    Sure can not beat the odds if you don't even know what the odds are.

  11. RICHARD WOOD | May 30, 2012

    BESIDES INVESTING IN GOLD, IT IS THE MOST BEAUTIFUL METAL ON EARTH. I HAVE HAD GOLD FEVER SINCE CHILDHOOD. I BOUGHT GOLD AT 50 DOLLARS PER OZ. IN THE 60'S AND 70'S , AND WILL BUY IT AT 1600 DOLLARS AN OUNCE NOW. ESPECIALLY U.S. GOLD COINS. YOU CAN'T GO WRONG WITH G O L D !!

  12. roshan | June 20, 2012

    when will the gold price fall to extreme and then rise again?

  13. Ted Yeomans | June 21, 2012

    I have always believed gold and silver are the only real safe investments. Even with the present downturn my investment portfolio would look pretty sick without the balancing effect of the precious metals. Even when gold was selling for $800 an ounce I had a hard time convincing my broker that gold was a good buy. I believe Eric Sprott was right when he said gold and silver prices were manipulated by Central Banks and certain futures and commodities exchanges for personal gain. The real financial crisis, I believe. was precipitated by this manipulation.

  14. CoreyG/Texas | August 22, 2012

    The 99% VS the 1% – A battle to be fought and won with truth and unity! The people have finally started to come together. You cannot convince me that tiny Iceland can handle the “Cabal” and WE cannot!
    Now is the time to join forces with those you would not normally consider. This is all starting to leak out to the main stream media… finally. We just need to KEEP THE HEAT on them. THEY win as long as they can keep us arguing with each
    Spread the word, others have carried the load of exposing this activity. Now we the people NEED to come out and make it a major issue in the news and in this political cycle.
    JOIN US, this is YOUR cause too (Click the “LIKE” button and spread the word): http://www.facebook.com/BankAndPoliticianFinancialCorruption

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