Ten Reasons Why Gold Isn't Above $1,000

Gold reached its all time high price above $1,000 per ounce a few days after the shocking Bear Stearns bailout. In the following months, gold often experienced sharp declines and has stubbornly refused to reattain the key $1,000 level despite more shocking bailouts, bank failures, and bankruptcies.

Reporters, analysts, and bloggers have cited a variety of reasons why gold has not exploded higher amidst the ongoing turmoil. Some of the reasons are more valid than others, but all are worth examining. Without further ado, the Gold and Silver Blog brings you the Top Ten Reasons Gold Is Not Above $1,000:

1) Dollar Strength

Against nearly every world currency, the US dollar has been strengthening. The dollar’s path higher has accelerated in recent weeks. Gold is thought of as a weak dollar play. With the dollar strengthening, selling gold is simply the other side of the trade.

2) Commodity Collapse

Since the summer months, commodities have been on the rapid decline. Oil has fallen by more than half from its peak price of $147. Base metals and precious metals have experienced similar if not more drastic declines. While gold has been holding up well on a relative basis, the weakness in commodities may be keeping any price appreciation at bay.

3) Deleveraging

After years of using excessive leverage in an attempt to maximize returns, firms are rediscovering the notion of risk. Massive deleveraging is taking place as firms sell any asset available to pay down debt. As an asset class, gold is not immune to such sales.

4) Speculative Selling

With the dollar rallying and gold breaching key technical levels, traders may be taking speculative short positions in gold, anticipating that prices will continue to move lower. This speculative selling compounds the impact of selling taking place for other reasons.

5) Recession

Fears of a worldwide economic slowdown and deep domestic recession will have a big impact on consumer discretionary purchases. This would likely hold especially true for luxury items such as jewelry.  Since jewelry production is the largest non-investment use for gold, any slowdown would put a drag on demand.

6) Deflation

While some fear inflation, others fear deflation. If prices decline across the board, some believe that all asset classes will be dragged down, including gold. Notably some people take the exact opposite position about gold and deflation.

7) Hedge Funds and Mutual Funds

Some people feel that hedge funds had a hand in driving the price of gold from below $300 to above $1,000. Now that fortunes have turned for their other investments, hedge funds are being forced to unmercifully liquidate large positions in gold. Mutual funds are also being forced to liquidate positions in gold to meet redemptions.

8) “George Costanza Trade”

On Seinfeld, George Costanza realized that every decision he ever made has been wrong. He discovered if he did the exact opposite of what his instincts told him to do, he would be successful. In relation to investing, when everyone believes that a certain trade or investment philosophy is certain to work, oftentimes with uncanny precision the exact opposite happens. This year, a growing number of people began to believe with absolute certainty that gold would move higher. While the opinion was far from universal, was the opinion widespread enough to invoke George Costanza?

9) Government Manipulation

There is a growing camp which believes that the primary reason that gold has not moved higher in a big way is due to government manipulation. If gold prices skyrocketed, the public at large would lose faith in fiat currencies and start to panic. It would be in the government’s best interests if this did not happen.

10) These Things Take Time

Some of the forces mentioned above are going head to head with the economic realities that should be driving the price of gold higher. Eventually we will reach a tipping point when demand for physical gold is enough to overwhelm all other factors. Once we reach that point, the price of gold will rise in leaps and bounds.

Comments

[Geodan:]

These points suggest why paper gold is not at $1000, but they do not adequately answer the question you posed in your October 9th article, "'Unprecidented Demand' for Gold Eagle Coins," which is "With unfulfilled physical demand, why has the market price of gold remained stagnant?"

We are looking at a recent precipitous fall to $732 for paper gold. I understand the free market value for gold bullion remains much higher, though still under $1000/oz., if you can find any.

Rumor suggests this dichotomy will persist until the presumed fraud of insufficient gold backing for paper gold is exposed, setting off a panic to redeem the paper. Unfortunately for many, it is said, redemption may well be in dollars, and not gold. That expose' event could drive the price of gold to $1200, and could happen very soon.

2008 Oct 26 10:21 AM

[NOWHEREMAN:]

Your #8 brings me to ask are "you" George Costanza?

Should all of your reasons be reversed?
"These things take time", no they don't.

5 months ago the DOW was at 13,000 and the S&P at 1400.

2008 Oct 26 10:56 AM

[Fighting Yoda:]

I am fully convinced gold is in a bear market. Dollar rally and commodity price plunge is suggesting deep recession and deflation. Risk aversion is leading people back into safe havens like yen and dollar not to gold.

Down the line the dollar printing activities will lead to inflation, but that is a little bit away.

Will sell my GLD, NEM, AUY (all at significant losses). Live to fight another day.

I think the market will go down a lot more, unfortunately covered my shorts too early. Will put new shorts in the next rally.

2008 Oct 26 01:12 PM

[Cesato:]

You well pointed out the extreme diference between speculation and serious predictions, I remember many contributors in this Blog either standing aside or building their short positions in paper Gold 2 months ago (I was one of them, however killed by the strong volatility), still analyst could not be more bullish, meanwhile. You should also note that the main drivers of the financial collapse, which by force would have dragged the Gold market down since the first sign of illness, were apparent a year ago. The stock market interpreted those signs properly back in Aug 2007 and consequently the DJIA topped out in October 2007, yet bogus gurus where still bullish in the DJIA (Does Cramer sound familiar to you?) through the end of 2007 and beyond. Long term investors understood those signs and timely setup exit strategies for 2008 while the currency and commodity markets went for the last run up until March 2008 (a misleading one by the way). Look, since March this collapse was clearly foreseen, there wasn't need to deleverage right away but to place orders and options in anticipation to what happened in August. Bottom line is that people like you and me write about "reasons why it did happen" but professional and educated investors made it happen. "George Constanza" pretty much discovered why investors are succesfull, traders just get by on a daily basis and people like you and me end up reading and writing in these Blogs .

2008 Oct 26 01:42 PM

[Alex Stanczyk:]

Gold is actually holdings its ground in this selloff quite well.

Chart: www.rapidtrends.com/bl.../

2008 Oct 26 02:27 PM

[Keer-eh Khar:]

The coming Iran war will send oil to $175 and Gold to $1200.

2008 Oct 26 02:35 PM

[xsuddensam:]

Who cares if gold goes down to $500 or goes up to $2,000? Only traders care. Those of us who have been slowly accumulating gold and silver over many years couldn't care less about the price.

2008 Oct 26 04:33 PM

[nmelendez:]

too true! I'm looking at the Dow/Gold. Even at a 5:1 at 9000 gold would be at 1800. In the meantime i'll keep accumulating on the cheap. Thanks short sellers, for selling me cheap stocks!!! jejeje

2008 Oct 26 06:56 PM

[Keer-eh Khar:]

Now, one thing that may change things fast is a strike on Iran mullahs between Nov 5th and Jan 18th (or in the future under Obama)-- you will see oil spike to the old high of $140 overnight -- In fact, some speculate the reason oil has been driven down artificially is due to the very fact that an attack on Iran is in the cards. By pushing down oil to $65, it will spike to $150 after the attack, rather than to $250 had the attack on Iran happened when oil was at $140 --

Oil will eventually climb to $175 easily, and Gold will respond by quickly going to $1200 and above upon and shortly after the attack on Iranian mullah regime.

2008 Oct 26 07:28 PM

[Caltorguy:]

I'd be willing to be some money that in two years gold will be over $1000, oil will be $200 and the Cdn dollar will be at $1.10 US.

2008 Oct 27 12:12 AM

[Wefwef:]

The time to buy gold was at $300. The time to sell was above $1000. The rest of you are bagholders for the next 25 years.

2008 Oct 27 10:27 AM

[The World's...:]

I fully agree with comment 1. Try to go out and buy gold at 732 dollars an ounce. You wont be able to find any below 800 dollars. The contract price is not real. With all the money printing we will see much higher prices in gold. That is a fact.

2008 Oct 27 12:20 PM

[Keer-eh Khar:]

That from a a derelict who belives in old cliches; go back to your bell-bottoms and side burns and pot - Woof Woof!

2008 Oct 27 01:37 PM

[Consider_this:]

Again and again I have to dispel myths about street gold prices vs contract price.

Why it such a huge surprise to gold bugs that something that is EXPENSIVE TO SECURE, DIFFICULT TO TRANSPORT, HAS A HUGE VOLATILITY RISK (based on recent decline), IS ILLIQUID IN SMALL PHYSICAL QUANTITIES is.... more expensive at retail than at wholesale?

Where do you think all that costs is coming from?

You cannot use cost-displacing/higher (than a $10.99 stock trade) transaction cost to prove a gold shortage. If there were a real shortage, you'll see *LIQUID* prices on the street far higher, like 40% or more, than contract price; not the pittance 10%+ I see quoted all the time.

2008 Oct 27 02:15 PM

[Smarty_Pants:]

Seems to me the main reason the price of gold is going down is because somebody is selling the stuff. Don't know who, don't know why, just know that they are 'for some reason' right now.

Eventually that will change. Fundamental case is for higher prices in the future as the dollar is devalued from massive dilution. When that happens is anyone's guess.

2008 Oct 27 03:13 PM

[Keer-eh Khar:]

The coming Iran war will send oil to $175 and Gold to $1200.

2008 Oct 27 06:22 PM

[Cesato:]

Smart_Pants you got it, the USD will not stay strong into 2009 and given the undeniable link between Gold and USD, Gold will regained its ground, it is a 4 months consolidation period though, I'll buy at USD 600, don't laugh at me please we'll get there on December. By the way watch out for the next sell off prior to the Thanksgiving weekend.

2008 Oct 27 07:28 PM

[anarchist:]

At this time in history there are no "undeniable links". Gold, oil and commodities in general will react differently. We have a financial crises and stock market crash coming down that, like those major crashes in the past will change the rules. We also have China emerging as perhaps the premier financial power in the world and the U.S. (think dollar) playing a very unpredictable role in the new order. I suspect that the so called 'traditional' role of gold as a safe-haven of wealth against political unrest and inflation may not wash in the future,

2008 Oct 28 09:49 AM

[Keer-eh Khar:]

The coming Iran war will send oil to $175 and Gold to $1200.

2008 Oct 28 03:51 PM

[bosun.j:]

One Reason Why Gold Is Not Above $1000

Banksters are gaming the system for their own benefit.

2008 Oct 28 07:01 PM

[bosun.j:]

Banksters gold is not real gold it is paper gold. Real gold trades $200-$300 more than Banksters paper COMEX gold.

2008 Oct 28 07:03 PM

[Keer-eh Khar:]

what the hell is a "bankster gold"? Quit inventing terms please Milton Freidman!

Btw: The coming Iran war will send oil to $175 and Gold to $1200.
Take THAT in your pipe and smoke it Baby!

2008 Oct 29 03:45 PM

[bosun.j:]

Keer-eh Khar said: "what the hell is a "bankster gold"?

Thanks for asking, To clarify, Bankster gold = COMEX gold. That is paper gold. Paper gold has the same value as any fiat paper.

Thank you for illuminating my error and giving me the opportunity to correct.

2008 Oct 29 06:27 PM