APR 16, 2013
The record-breaking drop of gold in the past few days has many investors greatly concerned. But a review of gold’s performance since the global financial crisis of 2008 indicates the fall is a short-term response to calamitous world events, as the world’s debt- and inflation-dependent fiat currency system becomes increasingly unstable.
We have witnessed two other similar instances of this kind of sheer drop in gold fortunes in the past five years. In late 2008, gold dropped 24.6%, pre-empting the Lehman debacle and the collapse of the Western banking system. The 2008 crisis set in motion a chain of events that proved to bring on the worst panic scenario since the Great Depression of the 1930s. As noted on BullionVault.com, “…a torrent of panic selling on commodity and global stock markets…froze the European and U.S. banking systems, and changed the direction of American politics for years to come.” The “meltdown” in equities worldwide erased $12 trillion of market value for the month, and $31 trillion from a year earlier. Lehman’s collapse left sellers with liabilities of over $270 billion, and “hedge-funds scrambled to raise cash by selling anything they could get their hands on, including commodities and stocks.”
The year 2008 was indeed another “watershed” moment in American history, as the country’s economy teetered on the verge of collapse. Every faction of the economy was hit, and Americans were suddenly caught in a vice-grip of instability and confusion. U.S. home prices continued an unrelenting slide for a “20th straight month, reducing homeowner wealth by about $3 trillion.” Stock market losses plummeted, creating an additional $8 trillion of “lost wealth.”
As disastrous as the economic slide of 2008 was, gold’s value also experienced another calamitous fall in September 2011. Gold fell 20% in a relatively short period—“as Europe’s risks exploded and stocks slumped, prompting a globally coordinated central bank intervention the likes of which we have not seen before.” We live in unpredictable times, and often our economic fortunes are tied to global geo-political or monetary calamities beyond our control. Gold value has a "nasty habit of predicting stock market crashes and deflationary scares, forcing the Federal Reserve and other central banks to double and triple down.” For evidence of this, one only needs to observe the hit the S&P 500 took after the major gold crash of 2008.
Signs of a possible worldwide recession have spelled an end of the commodities boom, perhaps temporarily. These dark clouds do have a “silver lining,” however. Gold and silver have been “correcting” since 2011, with more banks internationally buying up enormous quantities of gold, thereby increasing their gold assets and capabilities. Mike Maloney, founder and owner of GoldSilver.com, one of the world's largest bullion dealers, states, “Right now we are in consolidation. Gold has been chopping sideways for 19 months now, and it has worn people out. But basically gold is up. It is not up from 19 months ago when it was nearing $2,000, but it sure is up over the last decade.” He stresses that investors need to ignore the “short-term noise” and focus on the long-term benefits of precious-metal investments.
Just as gold presaged the deflationary period, it was the first asset to rebound to new highs, and through the ongoing deflation of the past 3 ½ years (and Bernanke’s on-and-off attempts to re-inflate), we sit some $437 higher.