It’s been a tough year for gold, especially after last week when we saw prices drop from the $1,620 range to the $1,580s. We’re still up in 2012, but not by much.
The chief reason behind downward gold prices seems to be deflation. As the world struggles with a global recession and slowdown in manufacturing, commodity prices across the board are taking a beating. Even crude oil dipped below $80 a barrel until prices were only recently rescued by a tropical depression in the Gulf of Mexico that threatens Texas and Louisiana. Some analysts are talking about gas prices below $3 a gallon by the end of summer.
Taking up the slack in the global economy so far has been the growing strength of the dollar, which is insulating our government from the true consequences of political gridlock. The rush to buy dollars and Treasury bonds has kept the cost of borrowing money artificially low and has, thus far, kept the U.S. from feeling the full force of loose monetary policies and deficit spending.
Gold and silver have not been immune to the deflationary pressures seen in commodities as a year-to-date price chart will show clearly. On the whole, silver has gotten it worse than gold as evidenced by the silver/gold ratio rising steadily since the beginning of the year. That’s because silver is frequently produced in conjunction with mining other metals. Gold mining companies can simply lay off a shift to slow production when prices dip, but silver just keeps coming.
Whether you think sinking gold and silver prices are good or bad, the current situation simply can’t go on. The Federal Reserve’s currency policy may be boosting corporate America to record profitability, but it’s killing the middle class. Monetary policy is rewarding people who take on debt rather than encouraging saving and robbing the retirement future of the most responsible segment of consumers.
While the 40 year era of loose monetary policy will come to an end, it won’t be next week. I expect gold and silver prices to recover next week on technicals, although the larger macro trend of the last year won’t end until the world crawls out of the current deflationary patch.
What we have in the meantime is the best opportunity to accumulate precious metals we’ve seen in a long time. Take advantage of the price dips, most of which are caused by derivatives trades settled in cash. Physical demand will pick up again as gold has shown surprising resilience, even in the face of deflationary pressure.