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APRIL 27, 2013
As recently as April 15th of this year, gold plunged $144 an ounce in its "biggest two-day decline since 1983,” totaling a 14.9% drop in price. However, the speed of gold’s most recent price drop is not rare. As Dr. Ron Paul explained on Bloomberg, “in the 1970's… it went from $35 to $200 rather rapidly, and then it lost 50%. Then it went up to $800.” Paul continued:
“To compare a couple of months or a couple of weeks and forget about a bull market in gold price in relationship to the dollar for 12 years. I would say the comparison is not an authentic comparison. What you have to look at is the inflation. Inflation is an increased supply of money [currency].”
The last time gold dropped this much, seeing “disorderly, hurried selling in the past five years,” it was July 2008. Gold quickly dropped 21%, and the price collapse “sent a ripple of alarm through the investment world.”
Is it different this time?
In regard to the drop in the price of “paper gold,” exchange traded funds (such as GLD) saw holdings fall as investors sold off their shares. If they are turning to investing in physical coins and bars in place of the ETF, the outflow indicates the demand for gold is actually rising. John Reade, partner and gold strategist at Paulson & Co., maintains, “While gold can be volatile in the short term…we believe the long-term trend of increasing demand for gold in lieu of paper is intact.”
Those who resisted the urge to “panic sell” in 2008 have been rewarded. Historically, following a dramatic drop in price, gold has always, after a delay, rebounded and climbed past its pre-drop high. This occurred after the 50% drop in the 1970s. World Gold Council data (below) shows historic price drops more frequent, deeper, and yet gold still returned significant gains to investors in the 1970’s mini-version of this massive gold bull market.
For those considering selling out of gold now, the wisest course is to first search for a weakness in your fundamental reasons for owning precious metals to begin with. Upon careful consideration, this most recent drop may serve as the catalyst for a review, resulting in “doubling-down,” as millions of others worldwide are doing now—and as they did the last time gold dropped this much.
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