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“After the trashing given gold and silver the last two days, Eric, it is time to go back to the basics.  So here are some of the many questions I have been asking myself, along with my answers, to see whether anything fundamental has changed in the outlook for the precious metals....

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1) Is the Federal Reserve decreasing the quantity of dollars every month by $85 billion to bring about a deflation and enhance the dollars’ purchasing power?  No, they are increasing the money supply by $85 billion every month, further debasing the dollar by transforming debt into currency.

2) Is the high level of unemployment being reduced so that more people are working and bolstering the economy?  No, there are 113.3 million people employed in the US in private industry, or in other words, those employees creating goods and services for profit.  Amazingly, it is fewer people than were employed in February 2006, over seven years ago.  

3) Is the future of the euro secure?  No, it is still hanging by a thread, moving warily from one crisis to the next.  Importantly, we now know from the Dutch Finance Minister to the EU that confiscating depositor money in banks in Cyprus will be the template for future bailouts, meaning the uncertainty about the euro and European bank solvency remains at scary heights.

4) Is the yen going to strengthen to decrease the attractiveness of holding gold in that country?  No, the Japanese government and central bank have laid out a blueprint to debase the yen even more rapidly than than the speed at which currencies of other industrialized countries are being debased.

5) Are all of the banks in the world solvent so that there will not be another crisis like Cyprus?  No, many banks - including some of the largest in the world - are so financially weak and undercapitalised that if you take away central bank support like the ECB did to Cyprus, they would collapse just like the banks in Cyprus collapsed.

6) Are crude oil and gasoline prices matching the fall in the gold price this year?  No, while gold is down about 18% since the beginning of the year, energy prices are basically unchanged for the year.  By the way, the gold price this year has fallen less than Apple, which has dropped 21%.

I could go on with more questions and answers, Eric, but I think my point is clear.  Nothing has changed except the gold price.  And more to the point, the lower price makes gold ownership even more compelling.  It is $240 cheaper, or in other words, better value than the $1600 price at which it traded at the beginning of this month.

Also, gold's fundamental and most important attribute remains unchanged.  Because gold is a tangible asset, it does not have counterparty risk.  So gold is money outside of the banking system.  Its value comes from its 5000-year history that has made it the money of choice where free markets reign, but unfortunately, there are few places where that happens today given all the interventions by central planners in so many markets around the globe.

The important question I have been asking myself today is whether we are in a selling climax that will finally end this correction in gold?  Only time will tell of course, but it sure seems like it.  The exceptionally high emotional level as well as high trading volume in the market today is usually seen at the end of a selling climax.

This seemingly relentless drop is a lot like the one in 2008 when Lehman collapsed, except for one point. What is the reason that gold and silver prices are falling now?  We know in 2008 that there was a rush for liquidity when Lehman folded and the latent derivative time-bond looked ready to explode.  However, this time there are no visible reasons.

If anything, current news events like the aftermath of Cyprus, the reflation in Japan and growing bank problems in the face of a weak global economy, are all bullish for the precious metals, which I think is very telling.  It seems likely this observation actually explains the reason for the drop in the gold price - the unprecedented amount of government intervention aimed to shake people and hedge funds out of their precious metals.

We have seen this drill time and again, though probably not to this extent since 1999 when the Bank of England announced it intended to sell one half of its gold reserves.  The anti-gold propagandists aim to make people fearful in the hope they sell will their metal - just like Gordon Brown announcing the Bank of England sale in advance was pure propaganda.

My sense of it Eric is that there is a financial and monetary train wreck coming, and it is not those who hold physical gold and silver who are going to be hurt.  When asset price collapses like this occur you must eliminate your emotions.  Just remember that this time will pass and the metals be trading significantly higher in the years to come.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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