Why Gold Price Can Still Go Down

Commodities / Gold & Silver 2009 Nov 27, 2009 - 09:23 AM

By: Mac_Slavo

The city-state of Dubai announced yesterday that they would not be able to pay the interest on their debt. Dubai, you may remember, saw explosive growth in real estate from 2001 to 2007, but when Real Estate Bubble Wave 1 popped, thousands of investors and residents fled the Middle East state amid collapsing housing and commercial real estate prices.

Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.

Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.

Though there was not much action in global stock markets on Turkey Day, as soon as markets opened this morning, stock sell offs around the world began. The Japanese stock market dropped 3.2% (-301.72), Hong Kong fell 4.84% (-1,075.91), but Europe managed to stay in positive territory for the time being.

US Stock markets opened to the down-side, with the Dow being off 180.19 (1.71%) points in early trading.

The most interesting asset class today is gold, which was trading down $27.60 (2.33%) at $1159 in early trading. Why is this interesting? If gold is supposed to be a safe-haven asset, shouldn’t it be rising during times of crisis?

This down move in gold suggests that, while the long-term trend may be in the up direction, the near-term movements of gold are still closely tied to the dollar. If we were to see investors flee equities and foreign currencies in favor of the dollar, as we are seeing on a limited basis today, then not only would stock markets come crashing down, but gold would follow suit.

The Dubai credit delinquency may be a small blip on the financial collapse radar screen, but given today’s action, it can be used to help forecast possible asset class movements in the event of a major stock market collapse.

For those gold bugs who are looking for a better price before moving more wealth into the precious metals classes, there is still hope, it seems.

Contrary to popular opinion, gold may not yet have become the last, safest asset on Earth. Investors may have simply been speculating on the price of gold moving up. For some, it may have been an inflation hedge, but according to the government’s CPI numbers, there is nominal inflation. And, if gold was really a safehaven asset now, then it should have been moving up, not down, on today’s Dubai news.

So, for the time being, we’ll side with those, like Marc Faber, who believe gold still has the potential to go under the $1000 mark, even as low as $800 - $900. This scenario may not be the likeliest, but it is still a possibility. Keep in mind that we have seen gold go from $1000, down to $700 in the last 18 months. Who’s to say it can’t happen again?

That being said, we are not selling any of our existing gold positions, simply because the long-term trend is the important one to be looking at. Gold will continue to edge higher over the coming years, not because of speculation or inflation fears, but because it will act as a hedge against government instability and incompetence, as it has done for thousands of years.

If you are trading and trying to make a quick buck, don’t get upset if gold surprises to the down-side in the near-term. For long term investors, gold is a safe haven asset, so hold strong - it’ll pay off in the long run.

UPDATE 11-27-09, 9:45 AM CST: