Why Gold Is Falling

One of my good friend asked why gold is falling ? Before responding I have 2 assumptions in mind :-images

  •  Gold investing is purely psychological. There is no real value in gold, other than its value as a conductor in electronics, etc. So all gold investing is pure game theory, its purely something that has no meaning, into which the only reason to invest is the belief that other people will do the same, for no reason other than their belief that other people will do the same…
  • Gold obtains valuation through a multitude of factors: scarcity, comparative value,

    confidence, utility in industry…etc. I would argue that the indebtedness of the US by comparison as a rationalization of value is much less valuable on traceable metrics. Essentially, as far as economics goes it will always be easier to justify the value of a commodity than speculation without a tangible rationalization. Whether or not gold was worth 1600 an oz. like the market was valuing it…probably not. That is more of a function of our economic shift towards valuing speculation to remove the cap on wealth that existed in the past.

So here what we could make of Gold can be viewed as a currency, and with most countries happy to see their currencies decline, one might think bullion would benefit, not suffer. Gold is also an inflation hedge; the latest Bank of America Merrill Lynch survey shows a net 40% of fund managers expect inflation to rise. So what is happening? One of the reason may be the mine production has picked up in the last three years while investment demand for gold has started to decline. The metal now seems a little pricey to jewellery buyers.

The current problem for gold is the same factor that helped fuel 12 straight years of price gains; there is no obvious way of valuing it. It has no yield or earnings. So gold bulls might be right to worry about inflation in the long run. But perhaps all those fears (and more) are already reflected in the gold price. The metal may also have benefited from momentum traders who jumped onto the trend, particularly via the ETFs; gold’s loss of momentum over the last 12 months may be driving the smart money elsewhere.

How about the real interest rates. When real interest rates are extremely low or falling, that’s good for gold. And there’s an intuitive reason for that. Collapsing real interest rates mean you’re not getting paid much for being in currency, and the real economy probably isn’t offering that much either. So, why not be in gold?

Another important piece was George Soros has cut his holdings recently. A change in trend for gold may require some signs that actual consumer inflation is rising .

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