Friday, June 11, 2010

Danger Point For Gold

Asking "Is Gold Set for a Dramatic Decline?," Charles Hughes Smith concentrates upon 2008 when gold tumbled by more than 30%; he ascribes the plummet to two factors. First of all is asset liquidation. Gold not dropping as much as other asset classes invites players to sell gold to meet margin calls, or other cash needs, elsewhere. This force could merely cause a short-term blip, had it not been for another factor: a banking crisis being widely seen as deflationary. The fact is, the fractional-reserve system imploding is deflationary unless compensated for by added fiat money. This is the second factor: widespread anticipation of deflation, prompting gold holders who anticipated inflation to get out of the metal.

It's the second factor that's the killer. Since many gold holders are betting on future inflation, there is likely to be a rush to the exits when a banking crisis threatens to take a piece out of the money supply. Gold may rise later due to reflation or other factors, but a banking crisis is provably bad for the metal in the relatively near term.

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