The party is over for gold -- and it looks like the hangover will last a long time. The warning signals were clear -- in hindsight, as is always the case. Gold has historically been a "hedge" against financial disaster. And there have been plenty of financial disasters brewing around the world in the past few months. But gold moved steadily lower -- culminating in a market decline of more than 4 percent early Monday in global trading -- falling as low as 1,088 an ounce before rebounding to over 1100.
There were simply no buyers -- and huge sellers. The trigger came when China said on Friday its gold reserves were up 57 percent at the end of June from the last time it adjusted its reserve figures -- but that was six years ago. Traders around the world had expected the increase in China's gold holdings to be much larger. Despite the increase, gold now accounts for 1.65 percent of China's total foreign exchange reserves, against 1.8 percent in June 2009 -- a significant decline. The report hit the gold market like the ice bucket challenge.
No Gold Buyers
If the Chinese, with all their reserves, weren't buying gold, who would be a significant buyer? Suddenly the markets realized there are obviously no big buyers around -- and thus the collapse.
Even the spectacle of a Greek exit from the Euro and bank closings in that country couldn't drive the price of gold upward. Even news that the European bailout of Greece with newly created credit couldn't spark fears of inflation. Even a massive stock market collapse in China, didn't drive investors to seek safety in gold. Even the nearly total collapse of the currency in Argentina, and a similar currency decline in Brazil, couldn't spark a rush to gold.
India is traditionally a huge buyer of gold, but recent taxes on gold imports, along with lack of monsoon rains there means potential smaller harvest for the rice crop -- and less money to be spent on gold purchases.
Prices of other metals sold off as well, with platinum falling below $1,000 for the first time in years and copper falling sharply. With oil now trading under $51 a barrel, the inescapable conclusion is that fears of inflation are vanishing down the dark hole of dis-inflation.
Canada has seen a 30 percent decline in the value of its currency -- mostly because its economy revolves around the sale of oil, and minerals -- including gold. And the decline has been accentuated by last week's unexpected cut in Canadian interest rates. The central bank is trying to make the Canadian dollar even cheaper, to promote its exports.
(For Americans looking to vacation or shop, our neighbor to the north is on sale; your U.S. dollar goes 30 percent father, though they are bound to raise prices quickly.)
Meanwhile, the U.S. dollar reigns supreme -- and is likely to only grow stronger if the Fed keeps to its timetable of raising interest rates in September. That will act as a magnet for global money to rush to the dollar. And with the dollar so strong, who needs gold?
The End of Gold?
You can expect further price declines in the gold market, now that long-term support levels have been breached. Technicians will tell you that the next support level is $1050 per ounce -- with the major support below that at $980. Margin call selling over the next week is likely to force a test of at least the first of those two levels.
But the real question is whether gold is truly a "barbaric relic" of the past -- an unnecessary, costly, and heavy way to safeguard assets in our modern world of digital currency. The jury is out on that, but I will always retain a healthy respect for gold -- the one asset that can neither be created nor destroyed by central banks in their misguided efforts to save the word's banking system.
That "hedge" against inflation may still be useful, down the road in the next 15 years when America will face the aging of the baby boom generation, with its drag on the healthcare and financial systems. Our $18 trillion dollar debt -- and the $76 trillion of promises made -- will come due. And we won't default; we will "print."
But in the meantime, gold is a drag on your investment performance. You don't have to "rebalance" your portfolio by selling gold at these levels. The market has done that for you. And that's The Savage Truth.