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« Deficit could exceed $1 Trillion! | Main | Gold Stocks: Oversold? »
Friday
Oct172008

Gold Drops to $800, Why?

Gold prices have not been performing as one would expect them to do in the current climate of financial crisis, failing to break above $920 and now dropping down to $800. This is because gold prices and the US dollar are inversely related, and we have seen a rally in the greenback recently. However, this is a false rally in our opinion, as it does not represent investors going to the USD, but moreover they are simply fleeing away from everything else. American stocks are being sold heavily which creates a demand for US dollars, and other central banks are cutting rates severely. The feeling is that at 1.5%, the Fed doesn't have the room to cut rates much more, but other central banks do since their rates are higher, therefore the US dollar is viewed as preferable relative to other currencies.

Despite gold's seemingly poor performance, the yellow metal is actually showing signs of strength. When the USD rallied to 80 and dropped back again, gold fell as low as $740. However the greenback has now soared to around 82.5, yet gold prices are trading at $800, $60 above where they were when the USD was at 80, and probably $100 higher that one would expect them to be trading with the USD at 82.5.

This shows the tremendous strength building behind gold, as it has held its value to a certain extent in spite of a rally in the greenback. As we have said, we expect gold to consolidate around $800-$850 before moving up to challenge $1000 towards the end of the year. We view gold as an essential part of an investors portfolio in the current climate.

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Reader Comments (21)

Are wepossibly seeing an inverted head and shoulders pattern developing in gold price?

October 17, 2008 | Unregistered Commenteralan

Gold is down another 25 dollars this morning. Yamana is 4.60 and Kimross is below 11. What happens when the US govt. starts selling their gold to raise cash. In large quantity's. Which Im sure their doing. This does not look good. Just as these Jan. calls don't look good. Gold to a thousand by year end????? It will take a miracle! I hope Im wrong... trust me. Im getting the crap beaten out of me right now.

October 17, 2008 | Unregistered CommenterGAry

Right..listen to this for a moment. Because you obviously have no clue why gold is trailing behind to all of your suprise.
Its really simple if you know the situation of the US dollar. Answer is; DEBT.
The US dollar is used as an export product for decades and American consumers and corporations are awash in debt. Even Uncle Sam is loaded with debt with over 10 trillion $ today. Not even mentioning the Social and Medicare benefits obligations... (totalling 175.000! dollar for every man, woman and child i the country).
Its a matter of fingerpop and confidence of lenders (Japan, China are the largest) are selling their bonds to get out of a falling currency. In my believe the fingerpop was initiated by Wallstreet and should open up wide in the coming decade.

So projected to today for gold. Gold is denominated in a paper currency, the dollar $. But when gold reaches $2500 dollar (and it will, no doubt about that) because of the fall of the fiat currency, then you essentially make no money, at least not for us Europeans. Because to use the "valuable" dollars, we have to exchange them for euro's (or other currencies) and that makes it uninteresting for investors to buy large amounts of gold. All because the currency behind the gold, yes the dollar, is poised to fail in the coming 10 to 20 years from now.

When the dollar is recoupled again to gold by the Bretton Woods act, then we have a solid amount of value, but that is not the case anymore.
Again, gold expressed in dollars is worth nothing. Wait and see for yourself in the coming decades.
Physical gold in a new fiat currency, the Euro € will have a brighter future, because its backed by assets and not debt.
Unless you like significant numbers, you could also go live in Zimbabwe. Buying bread for 70 million Zimbabwe dollars...

The people from Goldprices.biz should get a bit more macro-economic, cause these columns are getting unreal nowadays.

October 17, 2008 | Unregistered Commenterde Graaf

Gold may be under 800, but my local coin shops are out of coins and on back order for more. The demand is there (at least int he Tampa area it is). Do coin shops in your city have prodcut for sale?

Supply and demand is even more dramatic for base metal.
Zinc has fallen so low that producers are shutting mines.
Molybdenum miner TC at $6 a share, is well below its asset value, unless there is soem reason to think that molybdenum woule drop in half.

October 17, 2008 | Unregistered CommenterBC

In the Netherlands, we also have a run on bullion and coins. Gold, per definition is a good buy, but remember this: That if you live in the US of A. Your (debt)dollar will be worth less and less for the coming decades, following the dollars bear market and inflation due to global commodities demand. Barack Obama is really gonna have a large apple to beat in the coming years, to make America come back in order to survive the coming decades. With the track record of Republicans on the wheel, its gonna get much worse. Iran war next? My godd...more debt.

In 2005, the Methuselah of investment mavens, Sir John Templeton, then 93, said you should get out of U.S. stocks, the U.S. dollar, and excess residential real estate. Templeton believed the dollar would fall 40 percent against other major currencies, and that this would lead the nation's major creditors ― notably Japan and China ― to dump their U.S. bonds, which would cause interest rates to run up, thus beginning a long period of stagflation. He was right.

Gold will not benefit from dollars inflation the coming year(s). Gold will rise after the global recession/ financial depression has past by us and sound economies are returning to growth again. Then gold has a real bullrun awaiting for it with a platinum lining around it.
O and make sure you buy Canadian stocks in C$ instead of OTC US$ mining stocks, if you insist of buying them. Canada has a more sound economy and currency.

October 17, 2008 | Unregistered Commenterde Graaf

Just wanted to thank the gentlemen from New Zealand, whose comments made total sense. Gold will start to rally when things begin to calm down. I also agree with you in regards to Canada, I own a lot of Canadian companies and currency. Which I began buying when it was at 69 cents.
To the arrogant individual who was going on and on and on in regards to what gold is tied to- our debt- social security- foreign bond liquidation- WOW...YOU TAUGHT ME SO MUCH ...OH WISE SAGE.... Im concerned about Jan calls...not a year from now...

October 17, 2008 | Unregistered CommenterGAry

Sorry the Netherlands

October 17, 2008 | Unregistered CommenterGAry

Gary, I'm sorry i'm a bit down on the US nowadays. I love the country and people that live in it. But I give you just the facts.

What Jan calls you mean?

October 17, 2008 | Unregistered Commenterde Graaf

No problem... I'm down on my country too. Corporate greed, arrogance, deregulation of the banking industry and non- enforcement of security laws has hurt everyone. A lot of people need to go to jail. Including Chris Dodd-Barney Franks- too many CEO's to mention. I can't even start on The "W"-the VP- and his cronies. Anyway. I am way under water on Kinross and Yamana Jan- Calls. Own a lot. Not concerned with the stock I own long term. But the Jan calls are another story. Any thoughts

October 17, 2008 | Unregistered CommenterGAry

PS..Not to mention what all this has done to the rest of the world. A lot of healing has to take place after 8 years of Bush.

October 17, 2008 | Unregistered CommenterGAry

A lot of healing for sure.
Thats why I sold all my Yamana and also high-leveraged gold stocks recently, as I said in another column.
I took my losses and even yesterday I was trying to look at High River Gold mines. They were down bigtime. I think that was a nice moment to step in. But when I read further into some research;
They lost more than 50 percent of their stock price recently. Alfa Group backed out on capital raising deal due to market conditions. Some mechanical Mill problems slowing down production. And offcourse the large debt of 185 million dollars and a minor 10 percent liquidity at hand...
That does not look very good in a slowing demand situation. And that goes for alot of miners nowadays. Capital is expensive.

So Gary, I do not know where to bottom is. nobody does. But I think it is not the time to stay in miners today. Gold will go down further I believe.
ps: Did you see the price of gold today at Kitco? down again.

Think about taking your losses and buy in lower.

October 17, 2008 | Unregistered Commenterde Graaf

I think you were just talking about the same guy as if he's two different people there GAry. It must be one of those love/hate things..?!

October 17, 2008 | Unregistered CommenterM@

Yeah..Making a point. We worked it out. Seems like a good guy actually. A little misunderstanding. Now... Still no word from Bob on HRG, that is now at 14 cents. Shoiuld have sold at 60 cents a week ago and taken the 60 percent loss I guess What are you doing with this peeny stock now that they have lost a major source of funding. Will they Survive? At this point, I guess there is not much use in selling. ALso..Is IAG following the same path. FRG seems way underpriced. I think uranium is hurting them, but this will change at some point. FRG made a significant find recently in Utah I believe. IAG concerns me however and is dropping quick. Any thoughts?

October 17, 2008 | Unregistered CommenterGAry

THats penny stock...

October 17, 2008 | Unregistered CommenterGAry

Thanks to all for many words of wisdom.

As President Sarkozy of France and members of his government have been saying, this is the biggest economic crisis since the Great Depression, which it may equal or surpass. Of course, I'm sure that conscientious politicians in addition to the incredibly hard-working Mr. Sarkozy have been taking increasingly responsible positions in trying to moralize capitalism for the long term.

Mr. Sarkozy was right in emphasizing at the Francophonie Summit in Quebec City that however long it takes the situation to heal, we shall not be able to--nor can we now--consider it a mere parenthesis. Somehow a much greater dose of compulsory ethical behaviour patterns must be instilled into capitalism--or it will disintegrate into anarchy, chaos, war and for how long who knows?

My first step would be to make all shorting--"naked" or "clothed"--illegal. It is against the logic of capitalist investing anyway--the word is INvest, not outvest.

I have lost half my life savings to an excessive (it seems now) devotion to gold, silver and uranium. That's life. A few weeks ago, the editors of this newsletter were advising us to be fully invsted in gold and silver by late August or early September. Bad advice? Anyway, my latest move was to buy, this week, KCL, aka Potash One. Potash: another mineral, and which may prove more precious than gold some day, if anyone can afford either. Meanwhile, I still wish PMs well! I'm still the buy-and-hold type, the the mid-term future looks grim, especially when you're 59.5 years old. Best wishes to all. Neil (Canada)

October 17, 2008 | Unregistered CommenterNeil Bishop

Hi Neil, I can imagine how you must feel today after losing that much. But I hope your still invested and not imposed to margin calls? Lets hope so.

In that case, your investment should come back pretty soon in relative terms. At your age, you have a statistical 17 years to go, so that makes your investments of late August, early September not all too bad, don't you agree?
If you can keep them up, you'll be back in the money within 5 years, is my guestimate.

Hope you have some liquidity at hand to feed the mouth until that time comes. Good luck Neil.

October 17, 2008 | Unregistered Commenterde Graaf

Gary,

Re HRG, we have a had a reply from Dan Hrushewsky - VP Investor Relations, as follows:

"The company is currently looking for financing in this difficult market, and this may be contributing to the low share price (along with pervasive selling of gold stocks by US funds). As well, the Special Committee and its financial advisors are undertaking a process in which they are evaluating strategic alternatives. It is hard to tell how this will all end.

I hope that this sheds some light on the matter."

We have asked a few more questions so we may be able to give a fuller answer shortly.

However, at $0.14 we have taken a financial bath on this one.

October 17, 2008 | Unregistered CommenterGold Prices

Neil,

I feel your pain. Im 52 and Im down over 65 percent, as I was also a long time share holder of Wachovia Bank and Suntrust. Lets not forget my oil and gas that has gotten killed. I just never thought it would come to this. I know I should put my cash reserve to work now, but I can't loose it, and this is not like 1987. Wanted to get out so many times the past six months. Now with the the price of gold and silver.... It's tough. I will hold my gold stock. Yamana-Kinross-High river (a Joke)-FRG-Silver Wheaton-and GG and pray. It's tough. It's hard to see your money you've worked so hard for go away like this in your 50's. Im hoping I will regain a part of it in the next few years with a strong metal rally.Will see. Trying to keep some faith. Good luck...Gary

October 17, 2008 | Unregistered CommenterGAry

Attention please, Gold Prices

The Yamana call option mentioned by this newsletter is at 25 cents. Now we are all fully grown, and make mistakes. And I will say this even 10 cents on the dollar beats absolute zero. The only value left in the premium is some implied volatility, and time value. Should we consider an exit strategy of some sort, because 4 dollars and change is quite a distance from $12.50 strike price. There would have to be some amazing black swan event to happen. Usually in the past Aug lows were quickly surpassed, but we have these predictions of only 980 gold. Tell me Gold Prices what is the longest you have held an underwater option in the fall gold season that later turned profitable?

October 18, 2008 | Unregistered CommenterDavid

Great question. How long should we hold AUY and Kinross options.

October 18, 2008 | Unregistered CommenterGAry

The only black swan event I can imagine is a default on the December Comex gold contract.

Jurg Kiener

http://www.cnbc.com/id/15840232?video=880574352

John Embry at the 14 minute mark

http://watch.bnn.ca/tuesday/#clip104603

Jim Willie

http://www.financialsense.com/fsu/editorials/willie/2008/1009.html

October 24, 2008 | Unregistered CommenterDavid

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