April’s gold price drop led many investors to cash out, but physical gold buyers can’t buy fast enough. And this global gold rush isn’t slowing down... Read more...
Although Rogers admitted he wasn't going to be selling his hard assets, he predicted further consolidation and a near-term correction in the metals markets.
Predicting this short-term downturn, Rogers cautioned that gold had been on the rise for twelve consecutive years, a streak that was unparalleled. That was then.
This week, his prediction rang true as gold and silver prices took another huge hit. In the aftermath, gold prices are now down approximately 30% since reaching an all-time high in August 2011.
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 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.
The savings-seizing shenanigans in Cyprus just reinforced the importance of having gold and gold stocks in your portfolio. An indeed, with gold at extreme lows, now's a great time to buy more. Frank Holmes explains.
Until recently, an entire class of investors that control a huge pool of money - more than $27 trillion worldwide - have almost entirely ignored gold.
But lately, this group has begun to show more interest in the yellow metal, a trend that ultimately will exert massive upward pressure on gold prices.
We're talking about pension funds, which typically have had little interest in gold.
But with more traditional investments like bonds at historic lows, many pension funds aren't getting the returns they need to fund future obligations.
And with central banks debasing most major currencies and risking higher inflation, pension fund managers almost have no choice but to consider adding gold.
It's already started in Japan, which has about $3.4 trillion in pension funds - second only to the U.S., which has about $20 trillion.
In response to Prime Minister Shinzo Abe's pledge to spur inflation by printing more yen, Japanese hedge fund managers plan to double their gold holdings from about $500 million to $1.1 billion over the next two years, primarily by investing in gold exchange-traded funds (ETFs).
Itsuo Toshima, who represented the Tokyo office of World Gold Council for 23 years through 2011 and now advises Japanese pension fund managers, sees gold becoming a standard asset as inflation becomes more of a threat - with major consequences for gold prices.
"Pension money invested in bullion is "peanuts' at the moment," Toshima told Bloomberg News. "If 1% of their total assets shift to the metal, the gold market would explode."
It's dipped to a six-month low, and investors are nervous. But as long as gold is attractive to both the fear trade and the love trade, hold on tight to your share of the yellow metal. Frank Holmes explains.
There are a lot of moving parts to the gold story so let's start with the biggest takeaway: Gold prices are facing only a temporary setback.
Longer-term, as the U.S. Federal Reserve and other central banks begin to wind down quantitative easing and, more importantly, begin to ease interest rates back up to more "normal" levels, inflation should begin to kick in and drive gold up to new highs, making the yellow metal a great long-term investment.
First, though, let's tease apart the various factors that currently are driving the price of gold lower.
You see, currently China's gold investors have few opportunities to play rising gold prices, which they want to do increasingly to hedge against risk and inflation. Most buy gold bars and notes to bet on higher gold prices.
But they will soon have more options.
The China Securities Regulatory Commission on Jan. 25 announced the country's rising gold demand required diversified investment instruments. It announced provisional guidelines for gold exchange-traded funds (ETFs), which have been prepared for launch over the past few years and will be made available soon.
The CSRC said that the gold ETFs would be invested in the spot contract traded on the Shanghai Gold Exchange and up to 10% on other products.
In the future, the funds could be opened up to futures contracts.
"Later on, we will further open up the market and quicken the steps to integrate into the international market," Xie Duo of People's Bank of China said. "We should actively create conditions for the gold market to become integrated with the international gold market."
Here's how this news is bullish for gold prices.
But as Martin Grubb, managing director of investment for the World Gold Council, explained in a recent commentary for MarketWatch, it is not all that unusual for gold to experience a delayed reaction to macroeconomic events.
That's because gold is one of the very few assets that retains its value during tumultuous economic times. It is often the go-to holding investors sell when they need to raise cash, want liquidity, or are faced with margin calls. So events can trigger a gold sell-off and knock down prices before sending them soaring.
Grubb referenced Black Monday 1987 as a perfect example. The infamous day rocked markets the world over. Many feared it was a "financial Armageddon" as billions of dollars were erased from stock prices during the month of October.
Gold, instead of rising as market participants looked for safe haven assets, dropped as it was sold to raise cash to bolster accounts. It hit as low as $390 in the months that followed before rising to $484 by the end of 1988.
An even more extreme example of gold's liquidity role was the 1997-1998 Asian currency crisis. The Korean won was unacceptable in currency markets, so the Korean government stepped in and bought gold from locals in exchange for interest-bearing won-denominated bonds.
The Korean government sold the 250 tonnes of gold it received in the international market and was able to service its debt with the sales.
A more recent example of gold's initial sell off in a financial crisis is the Lehman Brothers bankruptcy in September 2008. Despite the bank's failure marking the credit crunch kick off, gold initially fell for a couple months as investors sold it for cash. Then it started a bull run that ran the price up 156% in three years.
Grubb wrote that we are currently in the infancy stage of a new crisis and gold's legendary behavioral pattern is repeating itself.
The precious metal is being liquidated to meet margin calls. In addition, it is believed the yellow metal is being lent into markets to provide ailing European banks with much needed liquidity.
"As a result, gold is not yet reacting to the worsening euro zone news and its current behavior is much like its behavior prior to and shortly after the Lehman bankruptcy," Grubb wrote.
The yellow metal glistened in early trading, with gold for August delivery rising 3%, propelled above the key $1,600 level. Fueling the strong gains in gold and other markets were encouraging words out of the European Union summit.
As the pivotal two-day meeting in Brussels wound down, global markets and commodities rallied after EU leaders struck a "breakthrough" deal to ease the recapitalization of banks. The plan was aimed at pulling the Eurozone back from the edge of its debt crisis.
The Basel Committee for Bank Supervision (BCBS) is about to decide something crucial to bankers, sovereign nations, and gold investors alike.
As part of the Bank of International Settlements (BIS), the BCBS is reviewing the upcoming new Basel III rules. That may sound arcane to you but I promise it's not.
Though rarely discussed in the mainstream press, the all-important Bank of International Settlements is essentially a global central bank to the world's central banks.
Its goal is ostensibly to provide global stability to the monetary and financial systems.
And in a surprise twist that only a few years ago would have been considered preposterous, the BCBS is entertaining whether gold should qualify as a full-fledged Tier 1 capital asset.
Currently, the precious metal is relinquished to a Tier 3 status, deserving no more than a 50% weighting at that.
Here's why that distinction is important and potentially astonishing.
Achieving Tier 1 status would credit gold with the recognition it's been denied ever since Nixon closed the gold window on August 15, 1971.
In essence, it would mark the official recognition that gold is real money.
But that's not the only reason gold is gaining respect. Other factors are brewing that will set the stage for the next leg up in gold prices.
As Banks Teeter, Gold Gains RespectOne of them is the crumbling state of world's banks. Once unwavering, the trust in these financial ivory towers is precarious at best.
In the last couple of months alone, Greek depositors have withdrawn billions of euros in deposits, as the fear of a "Grexit" looms large.
Not to be outdone, Spain banks have been emasculated by the Iberian nation's own bursting real estate bubble. After denying for weeks that a bailout would be required, officials finally caved to a "Spailout", giving Spain's banking system a 100 billion euro rescue package.
This phenomenon is not exclusive to the Eurozone either.
At the time it seemed like investors, traders and even the guy at the corner store were all buying, hoarding, and lusting for gold.
But the stellar gains were short lived, and by the end of the year gold prices had fallen by nearly 20%.
Part of the striking decline in gold was due to the fact that the "smart" money that had once been amongst gold's biggest cheerleaders, sold it.
Some booked profits, some sold it to reflect gains in portfolios, others were forced to sell to meet margin requirements, and others wanted to start the New Year with a clean slate.
Gold Prices in 2012Enter 2012, and gold prices enjoyed a lustrous January, rising some 10%, helped in particular by Chinese New Year celebrations.
Gold has since languished as investors became more willing to take on added risk, delving more into equities. While gold prices foundered, the Dow rose 8% in the first quarter, the S&P 500 gained 12%, and the Nasdaq enjoyed a nearly 19% gain.
And more recently, not even gold's best friend, Federal Reserve Chairman Ben Bernanke, offered up much help.
Following the commencement of the two-day FOMC meeting last week, gold experienced a volatile day, but managed to end virtually flat from the previous trading session. The Fed left interest rates steady and extinguished hopes for immediate further monetary loosening measures.
Without a promise of more quantitative easing, long gold holders headed for the exits.
Nonetheless, many sophisticated gold traders are poised to pounce on gold with every dip.
Among them is the storied and accomplished commodities investor Jim Rogers.
The most-active June contract settled on the Comex Friday at $1,660.20 an ounce, for a gain of 1.8%, or $30.10, since the April 5 market close.
Given the economic volatility in 2011, last year was a banner year for gold prices. Fears of global market turmoil helped push the yellow metal to record highs.
While the long-term bullish outlook for gold remains, short-term pressures have halted its steady climb.
"Gold has found more support recently, but it doesn't have all of the catalysts in place to be driven substantially higher yet," Suki Cooper, an analyst at Barclays Capital, told Reuters.
Here's why this dip isn't the start of a bearish gold year, but a chance to stock up before gold prices thrive and head to $2,000 an ounce.
Last week was a challenging one for gold investors. Gold prices have been on the downside.
Although the yellow metal has been on a spectacular 11-year bull run, recent strength in the economy has some thinking gold's heyday is over.
As I often say, investing, like life, is about managing expectations-even throughout gold's decade-long rise, price action over the short term can go both ways.
It helps to look at what happens after short-term drops.
For example, looking at the past decade of one-day 5% declines in gold, you can see that this event is pretty rare.
In 2006, gold dropped more than 5% in a day only two times. In 2008, there were three such events.
Another one occurred at the end of this February. Take a look: