The Collapse of Gold?

By Kevin Freeman
April 14, 2013Apr 14, 2013

Last week was among the worst in recent memory for gold. In fact, the price of gold has fallen sharply since peaking above $1900/ounce in 2011. It dropped below $1500 in early Asian trading. This is officially a bear market for gold after a dozen years of gains.

Many who have watched what is happening with massive monetary stimulus can't believe their eyes. How could gold drop so sharply when every major nation of the world is printing paper money like crazy?

We warned readers very near the top that even if gold is a great long-term holding, the short term can be extraordinarily painful. This is because the largest holders of gold worldwide are central banks that have a vested interest in maintaining the image that all is right in the world. One way to accomplish that is putting a lid on gold. Paul Craig Roberts, a former senior Reagan economic advisor, believes that not only are gold prices being suppressed but are actively being assaulted. The following are excerpts from his recent article:

The Assault On Gold

April 5, 2013  Paul Craig Roberts Prison  April 5, 2013

For Americans, financial and economic Armageddon might be close at hand. The evidence for this conclusion is the concerted effort by the Federal Reserve and its dependent financial institutions to scare people away from gold and silver by driving down their prices.

When gold prices hit $1,917.50 an ounce on August 23, 2011, a gain of more than $500 an ounce in less than 8 months, capping a rise over a decade from $272 at the end of December 2000, the Federal Reserve panicked. With the US dollar losing value so rapidly compared to the world standard for money, the Federal Reserve's policy of printing $1 trillion annually in order to support the impaired balance sheets of banks and to finance the federal deficit was placed in danger. Who could believe the dollar's exchange rate in relation to other currencies when the dollar was collapsing in value in relation to gold and silver.

The Federal Reserve realized that its massive purchase of bonds in order to keep their prices high (and thus interest rates low) was threatened by the dollar's rapid loss of value in terms of gold and silver. The Federal Reserve was concerned that large holders of US dollars, such as the central banks of China and Japan and the OPEC sovereign investment funds, might join the flight of individual investors away from the US dollar, thus ending in the fall of the dollar's foreign exchange value and thus decline in US bond and stock prices . . .

For now it seems that the Fed has succeeded in creating wariness among Americans about the virtues of gold and silver, and thus the Federal Reserve has extended the time that it can print money to keep the house of cards standing. This time could be short or it could last a couple of years.

However, for the Russians and Chinese, whose central banks have more dollars than they any longer want, and for the 1.3 billion Indians in India, the low dollar price for gold that the Federal Reserve has engineered is an opportunity. They see the opportunity that the Federal Reserve has given them to purchase gold at $350-$400 an ounce less than two years ago as a gift.

The Federal Reserve's attack on bullion is an act of desperation that, when widely recognized, will doom its policy.

As I have explained previously, the orchestrated move against gold and silver is to protect the exchange value of the US dollar. If bullion were not a threat, the government would not be attacking it.

The Federal Reserve is creating $1 trillion new dollars per year, but the world is moving away from the use of the dollar for international payments and, thus, as reserve currency. The result is an increase in supply and a decrease in demand. This means a falling exchange value of the dollar, domestic inflation from rising import prices, and a rising interest rate and collapsing bond, stock and real estate markets.

The Federal Reserve's orchestration against bullion cannot ultimately succeed. It is designed to gain time for the Federal Reserve to be able to continue financing the federal budget deficit by printing money and also to keep interest rates low and debt prices high in order to support the banks' balance sheets.

When the Federal Reserve can no longer print due to dollar decline which printing would make worse, US bank deposits and pensions could be grabbed in order to finance the federal budget deficit for couple of more years. Anything to stave off the final catastrophe.

The manipulation of the bullion market is illegal, but as government is doing it the law will not be enforced.

By its obvious and concerted attack on gold and silver, the US government could not give any clearer warning that trouble is approaching. The values of the dollar and of financial assets denominated in dollars are in doubt.

Those who believe in government and those who believe in deregulation will be proved equally wrong. The Uni
ted States of America is past its zenith. As I predicted early in the 21st century, in 20 years the US will be a third world country. We are halfway there.

Dr. Paul Craig Roberts is the father of Reaganomics and the former head of policy at the Department of Treasury. He is a columnist and was previously the editor of the Wall Street Journal. His latest book, "How the Economy Was Lost: The War of the Worlds," details why America is disintegrating.

It should be noted that last week Goldman Sachs predicted a drop for gold and lowered their target price to $1270 for year end 2014. Of course, this is the same Goldman Sachs that a year ago was quite bullish, predicting a move to $1,940/ounce.

Much more important that Goldman's call was the selling by Cyprus:

Cyprus to Liquidate Most of Its Gold Reserves

Reuters | Wednesday, 10 Apr 2013 | 2:55 PM ET

Cyprus plans to sell 400 million euros' worth of reserves to finance part of its bailout, according to European Commission documents. The move marks the biggest euro zone bullion sale in four years . . .

The real problem is that selling may not stop with Cyprus. Portugal, Ireland, Italy, Greece and Spain hold more than 3,230 tonnes of gold between them, accounting for the bulk of Portugal and Italy's foreign exchange holdings (90% for Portugal and 72% for Italy). If those nations were forced to sell their holdings, the price would drop even further.

Here are our previous posts on gold:
In this post, we discussed the pros and cons of gold and why it didn't make sense to have all eggs in the gold basket.
In this post, we explained why there are no simple answers and some of the short-term risks with gold.

Over the long term, it is hard to see how gold could continue to lose value relative to paper currencies. Looking around the world, it seems obvious that the United States economy is stronger than the rest of the developed world. Yet, this is a nation with a nearly $17 trillion debt and massive ongoing deficits and with its Federal Reserve adding $1 trillion per year in asset purchases. These facts are well known. But, how long can an economy be sustained when the average Federal spending per household exceeds the median household income? We found this amazing tidbit  from Terrence Jeffrey's book Completely Predictable (Sumner Books) mentioned in the Thursday April 11, 2013 edition of The King Report (M Ramsey King Securities):

Government Spending Per Household Exceeds Median Household Income

In fiscal 2010, according to numbers published by the Census Bureau and the Office of Management and Budget (OMB), net spending by all levels of government in the United States was $5,942,988,401,000. That equaled $50,074 for each one of the 118,682,000 households in the country.

       In that same year, according to the Census Bureau, the median household income was $49,445.

That means total net government spending per household ($50,074) exceeded median household income (49,445) by $629…

     As recently as 2000, the relationship between government spending and household income was dramatically different.

     Data from the Census Bureau and the OMB show that in that year net spending by all levels of government was $3,239,913,876,000. That equaled $29,941 for each of the nation's then 108,209,000 households. In 2000, the median household income was $41,990…

We have also discussed the possibility of gold confiscation, something that has happened in the past. If things got as bad as many fear, even if gold performs well there is a risk of confiscation.

Against this backdrop, it is interesting to note the efforts by various states to move to gold. In fact, Bloomberg made this point last week amidst all the other cross-currents on gold:

Trust in Gold Not Bernanke as U.S. States Promote Bullion

By Amanda J. Crawford – Apr 8, 2013

Distrust of the Federal Reserve and concern that U.S. dollars may become worthless are fueling a push in more than a dozen states to recognize gold and silver coins as legal tender.

All of this is to say that gold will likely remain volatile for some time. The short term may well see much lower gold prices. Over the longer term, however, when central bank selling is complete, we may see much higher prices.

Gold is a central issue in our ongoing global economic war.