Gold Continues Slide

Posted: Oct 13, 2012 12:01 AM

Gold prices continued sideways despite a recovery in the euro as markets remain concerned about the pace of global recovery. 

In early trading gold was up $2.52 to $1,771.40 and silver was down $0.12 to $33.95 with the silver/gold ratio jumping to 52.2.  

Not only is my $1,800 target for this week out the window, it also seems likely we’ll be down for the week.  Gold prices remaining flat on a weaker dollar is a bit of concern, and it wasn’t just precious metals.  Crude was up, but platinum, palladium and copper were all lower, reflecting a general weakness in industrial metals. 

On a long time horizon gold fundamentals are solid.  China’s central bank pushed their currency sharply higher against the dollar in an effort to attract foreign capital to Chinese banks.  That will provide the Federal Reserve with additional incentive to keep interest rates low and to use all of the planned quantitative easing they have on the table in an effort to give U.S. manufacturing an edge in world markets.

All this serves to point out how difficult it is to put a value on gold.  There is no formula that you can plug into a computer that spits out a value for gold.  Like any other hard asset or commodity, gold is worth exactly what a buyer with cash is willing to pay for it. 

Certainly we can use the spot price for gold as a benchmark, but that is only a guide.  The spot price is set by applying a mathematical formula to the price of futures contracts traded on the London gold market.  On a short-term basis that price can be manipulated by big trading houses.  Bids for futures can put in and later canceled; they can be laddered up and down, trading houses can collude to push prices around, which would be illegal...if they got caught (wink-wink).

That’s why I caution readers not to treat gold and silver as a growth investment.  Precious metals are defensive investments that allow the holder to preserve part of his or her wealth on a relative basis.  It’s extremely difficult to put an absolute value on gold, just like it’s difficult to put an absolute value on any hard asset. 

So don’t get too wrapped up with gold prices day to day.  Keep focused on the big picture as it pertains to currency.  On a long time horizon gold will find a new relative value to fiat currency and that is the real value of gold. 

Chris Poindexter, Senior Writer, National Gold Group, Inc