Why Is Gold Collapsing?

The following excerpt is from Foxnews.com:

Gold fell to its lowest in three months on Thursday on a stronger dollar, worries over a critical euro zone debt situation and a liquidity crisis which is pushing banks to sell assets such as precious metals to raise cash.

The current price of gold as this article is written is $1536.30 – down about $375 from its recent high. The price of gold has two components – the value of gold on the world market and the value of the currency that the gold is being traded.

The price of gold on the world market is declining based on “worries over a critical euro zone debt situation“? If this is true, who is so powerful as to be able to put  pressure on European banks so that they are forced to sell their gold assets as a reduced level? Who could be so powerful that they are able to call in “markers” on such a high scale of debt? It is strange that when the banks are failing and debts must be paid back that the medium of payment is gold. So what happens when the gold reserves of the banks are gone and the debt is still not paid back?

The second component of the price of gold for this discussion is the value of US dollars. The value of the USD (or FRN) is higher which reduces the cost of gold (and all commodities). The dollar is higher due to the declining value of the Euro and fear. People are buying dollars and US stocks for safety in the event of a worldwide economic depression or war.

The value of the dollar is the main consideration of the Federal Reserve. They do not want a strong dollar which will make our nation’s debt worth more. Is the dollar actually worth more? Against the Euro it is but the rest of the world is decoupling from the dollar as the world’s currency. Japan is taking the lead in this issue as they position their yen as one of the stronger components of the world’s “basket of currencies”.

So what does this mean for gold? If the price of gold is down on the world market due to low demand, then gold is a bad investment and will continue to decline. If gold is down due to pressure on banks to pay back debt at any cost, then gold is a bargain and will increase in value. If the people holding the bank debts want gold and can force the banks to sell it at a fire sale price, we have two questions to ask:

  1. Why do they want payment in gold?
  2. What happens when the gold runs out and the banks still have debt?

Another consideration is the concept of fiat gold. Will MF Global become the catalyst for a gold rush once people realize that their gold has been sold multiple times? I know one thing for sure: if banks are liquidating gold reserves at fire sale prices to pay off debt, the financial collapse is not far off.

David DeGerolamo

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