CA-F: We’re in a world where we have markets and we have management, so the question is which is dominant at any given time. In terms of fundamentals, the global economy is slowing, no doubt about that. The timing of the big drop in precious metals coincided with an announcement that growth in China had slowed. So there’s lower growth, particularly in the markets where there’s big demand for gold.
That tracks with the split about nine months ago between commodities and equities, when copper diverged inexplicably from the S&P 500. Can copper show that we’re in a powerful deflation and corporate earnings imply a recovery? Not at the same time. So either copper goes up or the S&P 500 goes down. If copper is right and deflation is the now the dominant theme, then people who need to raise cash will have to sell assets, including precious metals.
The argument for these being managed markets is that with Cyprus we saw the dawning of the realization that insured deposits may not be what they used to be and that regulators are planning bank resolutions without too-big-to-fail, which is to say at the expense of depositors and creditors rather than taxpayers. The Bank of England and Fed recently published an overview of how this would happen, with equity investors, uninsured depositors and creditors taking a big hit. There’s a lot of discussion in the blogosphere about the fact that that derivatives will have seniority in these kinds of circumstances.
Uninsured depositors and creditors in the fixed income markets are worried, and there’s a danger of real contagion in which paper wealth flows into physical precious metals. For regulators, the last thing you want is the gold price going to the moon while you’re trying to keep people in their bank deposits. In that circumstance gold becomes the safe haven, making it even harder to hold the bond market together.
So how to you make gold look riskier and more dangerous than an FDIC-insured deposit? You smash the price down. If you want to argue the case that this was a managed move, then I would say if you’re running the G7 nations you’re in the business of keeping the bond market going, so how do you keep trillions of dollars in the bond market that’s earning no money? You make the price look stable and make everything else look volatile.
DC: What does all of this mean for precious metals going forward?
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