Is this a major change of direction for gold?

Apr 17, 2013

Gualfin, Argentina

Whoa...this is getting interesting. Gold crashing on Monday...slight recovery yesterday. Stocks crashed on Monday bouncing.

What happened to gold? No one knows. There were reports of a really big sell order on Monday. But from whom? Why? Nobody knows.


    The CME's Comex unit is making it more expensive for speculators to trade after gold fell the most in 33 years today, dropping to the lowest since February 2011, after prices entered a bear market last week. Silver, also in a bear market, slumped 11 percent today and extended the year's loss to 23 percent.
In the financial markets we spend most of our time waiting for something to happen. Then, when years go by and nothing happens, we assume that nothing will ever happen. Then, when it does happen we are totally surprised.

Is something happening now? A major change of direction? Is another shoe dropping?

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We don't know yet.

Everyone believes the gold market has reversed direction. The bull market of the last 14 years has finally ended. It's all downhill from here, they say.

But if that is true, what else will have to be true? The last bull market in gold ended when the Fed changed course. Arthur Burns was replaced by Paul Volcker. A loose money policy became a tight money policy. Interest rates - which had trailed behind the inflation rate - were suddenly jacked up so high that real interest rates (the difference between nominal interest rates and the CPI) were as high as 5%.

'Don't fight the Fed,' they say on Wall Street. Those who fought the Fed back in the early '80s were wiped out. The Fed was tightening up. Volcker was determined to bring inflation rates down. That was not the time to own gold. It was the time to own bonds. You could buy a 10-year T-note with an 18% coupon. And interest rates (along with inflation rates) were headed down. Your bond would go up in value for the next 30 years.

By contrast, gold went down...down...and down. By the end of the bear market in gold there was hardly a single gold bug who was still sober or still solvent.

But what's the Fed doing now? Has it reversed course? Has Ben 'Bubbles' Bernanke been replaced with a tough-as-nails inflation fighter? Has the FOMC vowed to stop printing money Has the loosest monetary policy in US history given way to a tight policy?


Has the bull market in bonds ended? Have the lowest interest rates in half a century suddenly started to turn up?

Nope again.

Then what has changed to reverse the fundamental direction of the gold market? Nothing we know of. Instead, the Bank of Japan has recently joined the central banks of America, Europe and Britain, promising to keep printing money 'as long as necessary' to get inflation rate UP!

Every major government in the Western world is running a big deficit. Every major central bank is printing money. And every saver, as David Stockman put it, is being "crucified on a cross of ZIRP."

That's right, too. Savers had a field day when the Fed changed direction in the early '80s. They were paid to save...and paid well.

Now, savers are being punished. They earn less in interest than the real rate of inflation. Is that changing?

At the time the last bull market in gold ended, everything stopped in its tracks and turned around. Stocks had been going down for at least 16 years; they suddenly started going up. Bonds had been going down too, ever since the end of WWII; they too started moving in the opposite direction. Savers were rewarded; borrowers were punished. And gold reversed course and began an 18 year bear market.

Is there any major turnaround now that would justify or at least signify an historic turn in the price of gold?


Central banks and central governments are committed to a particular course of action. Does it lead to more valuable paper money? Does it lead to price stability? Does it lead to growth and glory?

Or does it lead to bubbles, crises, booms, busts, and an eventual blow up? As far as we can tell, central banks are looking for trouble. We still want to own as much gold as possible when they find it.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Is this a major change of direction for gold?"

sunilkumar tejwani

Apr 21, 2013

true indeed, but what matters is the price. Price of Gold had risen too fast, therefore a correction in the price was necessary, the trigger came from a nondescript European country which may be compelled to sell a part of it's gold reserves to meet the liquidity crisis.
All said & done, in the near term price is likely to fall further, for the simple reason of speculators unwinding their positions.


Krishna Kumar

Apr 17, 2013

There is no reason to disagree with points of view expressed in this article. However, a major point is being ignored. The global financial crisis is the result of Globalised excessive speculation using exotic financial derivatives and similar instruments marketed using innovative themes and mathematical calculations disregarding fundamentals and facts. Today Gold is also subject to the same behaviour. We are just speculation from equity to Gold. So Gold is also changing its color from being a safe asset to speculative asset and could be as risky as equity.

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