What's Next for the Price of Gold?
Before investors even attempt to guess what's next for the price of gold, they first need to understand why gold prices have fallen so much.
While some have blamed Goldman Sachs Group Inc. (NYSE: GS) for manipulating gold markets, Money Morning Chief Investment Strategist Keith Fitz-Gerald explains that the Goldman "puppet masters" are only partly responsible for gold's slide.
In fact, Keith says Goldman simply set the market up for this fall and that another catalyst actually caused gold's selloff…
Keith also has an answer for the question we're all asking: What's next for the price of gold?
Why the "Smart Money" in Japan is Investing in Gold
Tokuriki Honten Co., the country's second-largest gold retailer, reported Tuesday that Japanese investors doubled their gold purchases this week from the week before.
And Reuters reported how 63-year-old Yujiro Yamashita traveled to Tokyo's Ginza district to buy gold for the first time in 20 years.
It's thanks to fears stemming from Japan's new monetary easing, known as "Abenomics."
If You're Worried About Gold Prices, You Need to Read This
When stocks fall by 20% or more from their peak, it's labeled as a "bear market."
With gold prices down 26% from their record close back in August 2011, the "yellow metal" has entered a bear market of its own.
It took an especially ugly day on Monday to get us to that point.
Two days ago, gold prices plunged as much as 9.7% – the biggest decline since 1980 – and continued a sell-off that saw the yellow metal fall by 4.7% last week, including a 4.1% drop on Friday.
The metal has now fallen 26% from its Aug. 22, 2011 settlement record of $1,888.70.
To get some expert insights on this sell-off, I telephoned Peter Krauth, our resident natural resources expert and editor of our Real Asset Returns research service. Peter based himself in Canada to be closer to the miners and natural-resources companies he covers for his subscribers.
I asked Peter for insights on the following three questions:
Will Silver Prices Keep Falling?
Our Money Morning resources expert Peter Krauth explained the reasons behind gold's fall, so we went back to him to find out the deal with silver prices. Will silver keep falling? Is it a buy at the lower levels?
Here's what Krauth offered for investors.
Money Morning Staff: Peter, are silver prices falling because gold fell, or are there other factors at play here?
Peter Krauth: There are two factors.The first is that silver follows gold rather closely, and usually amplifies its behavior, both up and down. However, it can and does sometimes detach from gold and behave independently, but this is more of a rarity.
The second is silver's industrial demand.
Investing in Gold: Here's What to Do Now
Gold prices tumbled $140.40, or 9.4%, to $1360.60 an ounce. This brought the two-day decline to $203.70, or 13%.
- The Federal Open Market Committee (FOMC) meeting minutes that came out last week suggested the central bank may start scaling back its monetary stimulus measures later this year, reducing inflationary pressures.
- Goldman Sachs Group Inc. (NYSE: GS) last week cut its 2013 average gold forecast, for the second time, to $1,545 from $1,610. Investors like to dump the metal after the release of bearish research.
- There have been rumors financially strapped Cyprus was selling 400 million euros of gold, 75% of its reserves to raise cash.
Gold prices ended the drastic two-day decline Tuesday, up nearly 2% to $1,387.40.
Why Gold is Going Down
Gold and silver are taking it on the chin again today – leading many readers to keep asking me why gold is going down, and how long the plunge will last.
Gold futures today (Monday) logged their biggest decline since the 1980s, falling $140.30, or 9.3%, to $1,361.10.
What's up? Or rather, what's down?
On Friday, I went into a few reasons why gold is going down to provide some understanding of the action.
But with still further weakness, I'd like to delve in a little more, without repeating myself.
Why Gold is Down
You see, general markets are selling off today too, and even oil has lost $6 per barrel since Thursday.
Though off slightly, the U.S. dollar has maintained strength, probably thanks to speculation the U.S. Federal Reserve may end its quantitative easing sooner than previously expected. That hurts commodities which are all priced in U.S. dollars.
There's also been a considerable amount of selling of gold exchange-traded fund holdings, which has forced those ETF managers to sell their physical bullion. That has temporarily added supply to the market, which helps push gold's price down.
Why Are Gold Prices Down?
Gold and to a lesser extent silver got hammered pretty hard today (Friday) – leading many of our investors to write in and ask why gold prices are down so much this week.
Gold closed Friday at its lowest level since July 2011. In the last two days, gold was off about $70 and silver off about $1.60 at their worst points.
So what's going on?
Well, in the search for answers I can see a few reasons.
It started Tuesday, when UBS cut its average gold price forecast for 2013 to $1,740 from $1,900. UBS cited risks the U.S. Federal Reserve would end its current QE sooner than expected, a move into equities, low inflation, improving economic growth, and a stronger U.S. dollar.
Then Wednesday, the leaked Federal Open Market Committee (FOMC) meeting minutes showed that several members believe the costs of the $85 billion monthly bond purchases outweigh the benefits. We're being led to believe that "many participants" think improving unemployment could justify slowing up on bond-buying "at some point over the next several meetings."
Remember that these are not minutes where members' comments are actually written down word-for-word (like they ought to), these are carefully crafted statements to influence opinion. The Fed is known to try to "manage expectations, so it wants it to look like bond-buying will end sooner than later.
But I, for one, don't buy it.
Goldman Sachs Is Manipulating Gold Prices Right Before Your Eyes
Goldman set the table by predicting a turn in gold prices back in December 2012, which no doubt contributed to the precious metal's 5% decline in the first two months of the year.
At the end of February, Goldman issued a research report that said the big Wall Street bank had soured on the yellow metal, and dropped its three-month target for gold prices from $1,825 an ounce to $1,615, its six-month forecast from $1,805 to $1,600, and its one-year outlook from $1,800 to $1,550.
Then, just yesterday (Wednesday), Goldman doubled down on its negative outlook for gold prices.
The bank's new targets for gold prices are $1,530 in three months, $1,490 in six months and $1,390 in one year.
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. It was the biggest single-day percentage drop for gold in nearly six months.
"If you've ever suspected gold prices are being manipulated, you're not alone – and you're right, they are," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.
The proof is right in front of us.
Every Gold Coin Has Two Sides
Just as every coin has two sides, every data point that doesn't meet expectations usually has an upside somewhere.
For instance, although gold prices have fallen with the strengthening U.S. dollar, the yellow metal is appreciating in Japanese yen. So when negative news about the economy came out this week, along with the U.S. Labor Department reporting that the country added only 88,000 jobs in March, investors found reasons to be encouraged.
For one, the Federal Reserve is apt to maintain its stimulative easing course and keep interest rates low.
My Two Favorite Gold Mining Stocks
With the world's central bankers printing money like mad, you would think investing in gold mining stocks would be a no-brainer.
Yet despite these misguided policies, the Market Vectors Gold Mines Index (NYSE: GDX) is down 40% from its peak last September. Even worse, it's off 48% from its all-time highs in 2011.
Not even last Thursday's announcement that the Bank of Japan would buy $1.4 trillion in Japanese government bonds in 2013 and 2014 helped much-even though on a relative basis Japan's "stimulus" is more than double what Ben Bernanke has in mind.
So why all of the pain?…
And better yet, which gold mining stocks have fallen so far they are screaming buys right now?
Here's the answer to both questions….