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19 April 2013

What's Behind the Gold Price Plunge?

Since my time at REFCO (yes, that REFCO) I have maintained that gold is the most manipulated market in the world, behind fiat currencies of course. But what is going on with the dramatic price moves in gold lately?

First we need to examine what initiated the sell-off. It wasn't some world event or major development; the price move started after brokerage houses and Goldman Sachs notified private investors of an impending liquidation of gold by some large hedge funds. Has this happened? Not yet, and it probably won't.

Most of the price pressure has come from uncovered short futures positions. This isn't unusual in itself, considering the technical status and alleged overbought condition of the market. But we need to look at the bigger picture to get a clear understanding...

The Japanese have embarked on a qualitative easing campaign and the Federal Reserve is pressuring the Euro Zone to do the same. The answer to why, of course, is to prevent an uncontrolled crash of the Dollar because of the massive qualitative easing done by the Fed themselves in the past few years. There is an incredible amount of dollars out there that potentially represent a tremendous inflationary pressure. While the Federal Reserve tells their deflationary fairy tale on the one hand[1], on the other they are desperate to control the dollar. Gold presents a clear and present danger to the Fed's plan and so it is entirely likely they instructed Goldman Sachs and others to deflate gold.- Keep in mind, Goldman Sachs and the rest of the investment and fund houses will win no matter what. They are partners in crime with the Federal Reserve.

My advice -  I am not a "gold-bug" by any means. But ANY hard asset is better than dollars. If you have physical gold, hang on to it. Buy some if you have some extra funds, but don't tie up all your investment in it. The effort to prop up the dollar may get very ugly and gold volatility may go insane. If you have derivatives of any kind, and especially gold derivatives, you are gambling with your wealth. You might as well be at the casino.

[1] In a recent blog post, Gold Does Not Glitter, Paul Krugman tries to make the case that the gold price drop is proof there is no inflation danger.