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Why did gold fall today?
October 16, 2008
-From a Market Insider
We now know that, last week, that European central banks sold 7.6 tons of gold, which certainly put a heavy burden on the price and helps explain why the metal could not move higher.
It also appears that central banks are loaning gold to banks and bullion dealers directly as a means of injecting liquidity into the banking system. These gold loans are probably a significant multiple of outright official sales. In simple terms, a central bank may lend gold with a bank that instantly sells it into the market, generating cash. Central banks have great freedom to lend gold outside their new government mandated rescue programs and these lending activities are typically hidden by their accounting practices.
At the same time, there have been reports of gold sales by hedge funds to cover losses in global equity markets. That institutional trading of gold has added to market volatility, making gains in the past few weeks difficult to sustain.
Continuing strong physical demand for gold is a harbinger of gold's ultimate ascent. Gold-backed ETFs are also seeing a continuing inflow of money resulting in a growing pile of bullion held on deposit. Wednesday of this week, SPDR Gold Shares were backed by more than 770 tons of physical gold held on behalf of fund investors.
Recent data indicates that the major industrial economies are headed into a deep, prolonged, synchronized recession. Oil and industrial commodity markets are confirming these dire expectations. But a deeper downturn means that policy makers will need even more aggressive monetary ease and fiscal spending to breathe life back into the sick economy -- and governments will be even deeper in the hole. The federal budget deficit soared to $454.8 billion in 2008 as a housing collapse and efforts to combat the economic slowdown pushed the tide of government red ink to the highest level in history.
In the end, as the global economic recession deepens, governments will find the only way out of this mess by printing more money – boosting the price of gold.
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Copyright © 2009 Blanchard and Company, Inc.
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