Monday 15 April 2013

Gold Price Collapses

As I write this on the 15th April 2013, intraday gold prices are down 9.22% (silver 11.8%). The yellow metal is down 25% from its high of $1800/oz back in October. I've been bearish on gold for quite some time having written a couple of posts on the topic which I will provide links for below.

The reasons I gave for my bearishness were as follows.

1. Gold is a non productive asset. Therefore unlike a let property or a dividend yielding share of a company, you get no return for holding the asset. The only way you can make money on it is if the price rises. In the long run productive assets have outperformed gold by significant amounts.

2. It can cost a lot to store in any quantity, thus giving it a negative yield. Compounded over many years these costs would offset a proportion of any nominal price rise. You could call it a destructive asset in this sense.

3. It is already historically very expensive. Yes huge gains have been made over the past 10 years, but will this trend continue? Lots of gold ETFs (Exchange Traded Funds) have been set up which have to have a physical underpinning of the underlying asset. Such is demand for these products that recently banks have had to build more high security bunkers to keep all this gold in. Interestingly the UK has become a global hub for private storage of the world's gold. What if we manage to muddle through our economic problems and financial meltdown never materialises? Will people decide that paying good money to store their unproductive gold is possibly a bad idea and sell? There could be a massive rush for the proverbial exit from these highly liquid ETFs.

4. If people do start selling how low will the price fall? What is the intrinsic value of gold? Last time gold was relatively this expensive was in 1981, if you look at the graph above again you will see that 1981 was a pretty bad year to buy gold, if you bought then over the following 20 years you would have seen a gradual erosion of your investment.

5. How safe is an investment in gold anyway? During the great depression the US government brought in Executive Order 6102 which more or less banned the ownership of gold. The government ran a compulsory purchase programme, forcing people to sell at $20.67/troy ounce. The rationale was that the hoarding of gold was making the recession worse. Punishment for non conformity was a fine of $10,000 and up to 10 years imprisonment.

In the second link I posted above, I even mentioned trying to profit from the demise of gold via my CFD account (Contract For Difference). Unfortunately I didn't have the conviction to put on the trade, and I still don't. Gold is a highly volatile investment and its value is only based on what the market will pay for it, nothing more. It is possible that this could be a pullback and the Ponzi rally will continue later, I simply don't know and am not willing to risk any money on it.

P.S. I do find it amusing when gold bugs fool themselves that the extraction cost of gold (approx $1100/oz) might be the lowest possible price floor that the metal will reach. They are not taking into consideration the mountains of gold that are stored in the ETF holding facilities across the world. 'Extracting' that gold will cost a LOT less than $1100/oz! Also the demand for gold is highly volatile and has the potential to dry up in an instant, causing massive oversupply. Is the tide going out on this investment? Are you swimming naked?


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