Why is the
gold price down when there is so much financial turmoil?
30th September 2011
It is never easy to say with certainty what is
happening day-to-day in the gold market. By nature, this is a private market
which is opaque by design...those who own gold do so in part because it affords
anonymity and independence from the conventional financial system. That said, here is our best guess as to the reasons behind the 20%
decline in the spot price of gold from its recent high above $1900 to a low of
First, last week's Federal Reserve FOMC meeting did
not produce a plan for further expansion of the Fed's balance sheet. Some
investors in gold clearly expected such a development. The aggressive selling
of gold began on Wednesday after the FOMC statement was released.
Secondly, as the debt situation in Europe continued to
deteriorate, European securities fell sharply, forcing European gold holders to
liquidate in order to reduce leverage. Much of the selling pressure on gold
over the past week has originated in Europe. Widespread reductions in Euro Zone
growth estimates and open disagreement and confusion over the next tranche of
Greek bailout funding contributed to an abrupt downturn in markets. Gold
performed its traditional role of providing emergency liquidity.
Perhaps most importantly, investors began to
anticipate a disorderly Greek default and interpreted it as a possible Lehman
moment. Investors, like generals, tend to fight the last war. All of us
remember that, in the fall of 2008, the authorities let Lehman go into an
unplanned bankruptcy with immense unintended consequences. Gold fell in
response. When the Troubled Asset Relief Program (TARP) passed Congress, it
recapitalized the banking system, contained the Lehman contagion effect and
gold began to recover, closing higher on the year. Would
a Greek default or the failure of a major European bank trigger a similar
crisis of confidence in the financial system? And would a dysfunctional Euro
Zone be able to produce a TARP response quickly enough? Anticipating that gold
could fall in such a circumstance before effective money printing could be
implemented, gold was sold.
It looks to us as if gold is waiting at the
cross-roads to see what happens in Europe. The key question is...do we get a
Lehman event followed by TARP or TARP followed by Lehman? The Euro zone
probably needs several weeks to complete the passage of the 440 billion euro
European Financial Stability Facility (EFSF) and structure the proceeds into a
vehicle to stabilize the banking system. Then, we will likely get a controlled
Greek default, within the Euro, with a EuroTARP
limiting contagion. Do we get a Lehman moment before the TARP architecture is
in place? AND are the Germans willing to lever up the EFSF commitments as
required? (440 billion euro is not enough). If 'Lehman' comes first, gold could
take another hit (although this may already be priced into the
market)...therefore western players wait to buy while Asians feast on the low
price for physical gold. If TARP comes first, we think gold explodes to the
upside. We believe that the Euro Zone will not allow any defaults until the EuroTARP is in place.
In the short term, aggressive physical gold buying
among Asians appears to be balancing western fears of disorderly default. A
growing number of central banks are also buying regardless of higher prices.
Newswires this morning report that, in August, Thailand bought 300,000 oz. of
gold, Bolivia purchased 225,000 oz, Russia added
another 118,000 oz and Tajikistan bought 60,000 oz.
In the longer term, the 'solution' to the unfolding debt crisis will, in our
view, be more money printing and a higher gold price.
That's the way central banks have dealt with every similar crisis in the past.
Why would this time be any different?
Please note that this information expresses the views
and opinions of Seabridge Gold management and is not
intended as investment advice. Seabridge Gold is not licensed as an investment