We don’t pay much attention to gold, believing that the price of the metal depends more on what someone is willing to pay for it as opposed to some intrinsic value. However, the near crash in its price has caught our eye lately. Why is gold dropping in price? We think:

  • The stage was set months ago, as gold prices flattened and drifted down. With stocks and bonds booming, and the need for income and yield acute, it’s hard to justify holding an asset that requires storage and insurance, and pays no dividend. Yes, we know not everyone holds gold that way, but someone has to hold it that way, and those owners represent a huge part of the gold market. Probably more than one holder has shifted towards financial assets lately. 
  • Cyprus is heading towards a sale of some of its gold reserves in order to self-fund its bailout. Portugal, lurching again towards a crisis, has a veritable boatload of gold, and might elect or be forced to do the same. The prospect of this kind of supply coming onto a market that has been weak for months is causing an acceleration of the decline.
  • Today’s price action was brutal, and it coincides with slower growth reported by China. Inflation worry-warts can see the writing on the wall: we are about to shift from obsessing about rising prices to obsessing about falling prices and weaker economies. Even though currencies are being mistreated in a race to devalue, there’s little inflation as a result. What role, then, for gold?
  • Gold’s price is echoing some serious deterioration in other metals and oil. With China slowing, commodities are in for a rough go for a while.

We have no idea where the ounce price will stop, but we’d be willing to bet it’s lower than today’s price.