Here’s a good collection of different explanations of the sharp decline in gold that also seemed to drag down other assets, including U.S. stocks. My belief is that like most market liquidations, a series of events were at work. The recent price weakness despite all the global monetary expansion likely was caused primarily by governments and central banks in southern Europe having to sell gold. The selling was joined by other investors and accelerated with the news that Cyprus was being forced to sell gold and that other European governments might have to sell as well. Once the price of gold declined below a certain level, automatic selling programs and margin calls were triggered, generated additional selling that caused this cycle to repeat. Eventually some investors have to sell other assets to meet their margin calls on gold.
I think this move is relatively short-lived. Strong investors with a lot of cash who weren’t in the market before this slide will buy when they decide the price is low enough. We’ll know if I’m right if the price stabilizes soon.
There’s also a theory that the Federal Reserve is manipulating the gold market to prevent its monetary policies from causing gold to soar, which is included in the link.
Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollar’s exchange rate. The Fed used naked shorts in the paper gold market to offset the price effect of a rising demand for bullion possession. Short sales that drive down the price trigger stop-loss orders that automatically lead to individual sales of bullion holdings once their loss limits are reached.
According to Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can be to drive down the market price.