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So . . . What Happened to Gold ?


The second quarter of this year was the worst quarter gold has ever experienced, since markets began trading it many years ago.  From over $1,900 per ounce a few years ago to less than $1,200 at quarter-end, what happened?

The truth is seldom flip, and neither is this.  First of all, since we measure the value of gold in dollars, the value of gold falls when the value of the dollar rises, as it did this quarter when the world realized the economic engine of the world might not be China after all, but might instead still be the good, old U.S.A.  Plus, with everybody misunderstanding Bernanke’s last press conference, the world expected higher interest rates in the U.S., which would drive up the value of our dollar, further driving down the value of gold.

Secondly, China is the world’s second largest purchaser of gold, and their purchases decreased as their economy cooled, which is normal.  Third, the world”s largest purchaser of gold is India, where gold has almost a spiritual significance.  They also decreased their purchases as their economy has cooled.  This decrease in purchases was exacerbated by a decline in the value of their rupee currency, which drives up the value of gold when measured in rupees.  As the rupee lost value, they had to pay more rupees per ounce of gold, and therefore bought less.  Lastly, the Indian government imposed a luxury tax on gold purchases, making it even more expensive for Indians to buy.

The recent recovery in the price of gold to about $1,250 per ounce does not signify any serious rebound for the short-term.  One reason for this bounce in price is that some investors have been covering their short positions and are not really buying gold to hold, just to cancel a short position, which means they previously sold gold they did not own and might have to actually own some gold to surrender to their purchasers.  Another reason is that the Indian wedding season is already over, so there is a normal seasonal swoon to gold prices, and we missed the season.

Lastly, there is no believable, verifiable indication of inflation yet, which normally drives up the price of gold.  When we can actually see inflation on the horizon, gold will rise . . . as long as the Indians keep getting married, of course.

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