Gold Down Hard

Posted: Jan 05, 2013 12:01 AM

There were plenty of indicators of continued bearish pressure on the gold market but the depth of Friday’s gold crash is extreme even by those standards. 

Gold was down $24.70 in early trading to $1,636.30 and silver was down $0.59 to $29.51 raising the silver/gold ratio to 55.4. 

The silver/gold ratio going up nearly a full point overnight means this is a genuine softness in gold prices and not a general softness in commodities.  To be fair industrial commodities were lower on a stronger dollar with crude oil, copper, platinum and palladium all trading lower but gold was down by far steeper margins. 

So why was gold getting it on Friday?  The most likely explanation is an announcement that the Fed is talking about an end to bond buying.  The first whiff of a rumor that the loose money policies that have been with us, more or less since the late 90s, may be nearing an end sent gold futures tumbling. 

February gold futures dropped 2.3 percent, to the lowest prices since August.  Silver prices also dropped but overall held up better than gold by nearly a full percentage point. 

What that changes for people like you and I is absolutely nothing, although if the downtrend continues, I’ll switch back to splitting my regular buys with gold instead of putting it all in silver. 

For one thing you shouldn’t be buying gold and silver as a growth investment; that’s why you buy stocks that pay dividends.  You’re buying precious metals to hedge against the value of currency and when gold prices are falling faster than currency on a percentage basis, that’s a good time to add to your holdings. 

I also don’t believe for a minute that the Fed is going remove the easy money punch bowl from Wall Street’s banquet table.  Like a junky addicted to heroine, Wall Street has come to depend on cheap money to finance their derivatives habit.  And while the dealer of all that cash may be threatening to raise prices, I’m not at all certain the Fed will be able to stand firm when the convulsions of withdrawal start to wrack their buddies in the financial sector. 

In the meantime, take advantage of buying opportunities when they appear.  If gold dips below $1,600, that’s a very attractive price.  Silver under $30 is always happy territory for buyers, a price silver reached only during the summer last year. 

Chris Poindexter, Senior Writer, National Gold Group, Inc