Gold prices sank on Friday and just kept going south all day and didn’t stop until they reached the $1,750 range.
Gold ended Friday down $15.79 to $1,753.10 and silver was down $0.63 to $33.44, raising the silver/gold ratio to 52.4. Precious metals were down for the week as well.
Tanking gold prices with a rising silver/gold ratio almost brings back memories of this summer’s trading pattern. Not only did gold go down, it went down on hard on day that the euro gained against the dollar. Precious metals and industrial commodities took a thumping and it never let up all afternoon.
So why the big move down on a week when most analysts, including myself, expected gold to move higher? I could probably point to this or that and be at least partially right, but the truth is markets are made up of a myriad of conflicting directional pressures that push prices up and down. Picking out one that was really the cause of a spike or crash in hindsight is not a particularly impressive feat.
For gold last week one set of figures that almost certainly figured in the price drop was the dissolving debt in the U.S. economy. We get so used to throwing rocks about deficits and government spending, it would be easy to miss the drop in the debt to GDP ratio and the gradual disappearance of debt at the federal, state and consumer level. Retiring debt has been fashionable in America since 2008 and it’s starting to show.
When the government starts getting responsible with finances, it prompts investors to flood into U.S. Treasuries. The instruments the government sells to finance our debt attract more bids and the cost of additional borrowing plummets. This sudden outbreak of responsibility is a balancing force on the Fed’s plan to print more money via quantitative easing. I do believe that, on a long time horizon, inflation will happen. Inflation running at 2 percent a year doesn’t sound like much but it adds up over time.
Gold’s track to inflation won’t be smooth and there will be noise as other market forces assert themselves at different times. On a long time horizon, gold will find an equilibrium with currency relative to inflation, but along the way will be days like Friday.
For next week that, once again, leaves us at the mercy of fairly well-balanced forces. Friday was a down market in the face of upward forces. It wasn’t just gold and silver, but industrial metals across the board. The silver lining is that if the selling continues we might reach a bonus buying range.
Chris Poindexter, Senior Writer, National Gold Group, Inc
Moody's Puts Puerto Rico on Downgrade to Junk Review Citing Very High Debt, Pension Obligations, Chronic Deficits; Exodus Underway | Mike Shedlock