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What Has Caused the Recent Drop in the Price of Gold?

We’ve received a number of questions from folks over the past couple of days inquiring as to what has caused the price of gold to drop.  In this article, we’ll attempt to provide some insight as to the reason for the sharp correction and what we can expect in the future based on economic scenarios that are likely to play out.

First and foremost, it’s important to note that gold is a commodity, so when the commodities market as a whole moves in one direction or the other, the price of gold tends to move in sync; although, typically to a lesser extent due to individual’s view of gold as not only a commodity, but also money.  Gold, throughout history, and up until 1933 in the United States, was used as money.  Even today, you can use American gold eagles as money for the denomination or face value stamped on the coin; although, the face value is substantially less than the gold value of the coins.

Structural weakness in the U.S. economy is causing the price of commodities to go down, as the belief is that there’s going to be less demand for most commodities in a slowing economy.  This makes sense, as fewer products are likely to be produced when general activity in the market place has slowed.  Furthermore, the Fed’s recent announcement of “Project Twist,” which involves the sale of short term bonds and the purchase of long term bonds, in the mind of most investors wasn’t sufficient to stimulate demand in the economy; therefore, the prognosis is that the economy will continue to muddle along for the foreseeable future.

Another factor affecting the price of gold are the events taking place in Europe.  At this point, it appears as though a Greek default is inevitable.  Furthermore, there’s a concern of possible contagion; wherein, other European countries which are on unstable financial footing, such as Portugal, Italy, Ireland, and Spain may default.  The spread of defaults across Europe could potentially threaten the existence of the Euro as a currency. As a result, investors are selling euros and buying dollars as a safe haven.  This is the first demand in dollars  that we’ve seen in quite sometime, and since precious metals and dollars are typically inversely related, we’re seeing a sell off of precious metals, affecting the price of gold, silver, and platinum.

So the question on everyone’s mind is: are we going to see an increase or decrease in gold and silver prices from its current levels?  Over the long term, the price of gold and silver is likely to go up for several reasons.  For one, gold and silver has been a safe haven for investors over the past few years, and that trend is likely to continue.  Secondly, the U.S. bond market appears to be in a bubble, and when/if the bubble pops, precious metals are likely to be the beneficiary of at least some of those investment dollars.  Thirdly, considering the debt and deficit issues in the United States, a strong dollar isn’t likely to persist into the future.  Last but not least is that the Fed has stated, and has proven so by their actions, that they’ll do whatever it takes in their power to stimulate the economy. The Fed stimulates the economy by creating loose monetary policies, swapping toxic loans on the books of banks with treasury bonds, and by buying bonds in the open market or through intermediaries to suppress interest rates.  All of these actions are favorable for the precious metals market.

The key at this point is to not panic.  If you’ve been investing in gold, silver, and platinum as a hedge against inflation, the loose monetary policies of the Federal Reserve, and the record level debt and deficits in the United States, then nothing has changed from this perspective.  Look at the drop in the price of gold, silver, and platinum as a buying opportunity to purchase gold, silver, and platinum coins at a discount.

We hope that you have found this article informative, and welcome you to contact Atlanta Gold and Coin Buyers at 404-236-9744 for all of your coin buying and selling needs.  We look forward to hearing from you and earning your business!

Tony Davis
Tony Davis