GOLD PRICE NEWS - The gold price plunged $16.12 to $1,238.36 on Monday as strength in the U.S. dollar and profit-taking in precious metals pressured the price of gold. After the gold price rose to $1,263 this morning - within $2 of its all-time high, the price of gold quickly reversed to the downside, plunging to as low as $1,237 per ounce. In spite of today’s sell-off, the gold price remains higher by $24.22, or 2.0%, in June and $143.03, or 13.1%, year-to-date.
Weakness in the gold price sent shares of most gold stocks lower, as the Philadelphia Gold and Silver Index (XAU) finished down by 1.1% at 183.81. Notable decliners in the sector included AngloGold Ashanti (AU), Freeport-McMoRan Copper & Gold (FCX), and Randgold Resources (GOLD). Shares of AU, FCX, and GOLD fell 1.5%, 2.9%, and 1.1%, respectively.
Notwithstanding today’s decline, the gold price remains within 2.1% of its record high and has been the best performing asset of the past decade. As GoldAlert has discussed on numerous occasions, one of the primary catalysts for the ascent in the gold price has been the efforts of central banks to attempt to prevent a deflationary global recession from playing out. Deflation is greatly feared due to the fact that central bankers have had minimal success preventing it, with the U.S. in the 1930s and Japan over the past two decades being two prime examples.
Leo Isaak, a “Professor” at Minyanville.com, wrote a piece titled “What’s Wrong With A Little Deflation” in order to clear the air on the often maligned economic term. Mr. Isaak, who formerly worked at Smith Barney and Merrill Lynch and is currently the head of Axios Capital Advisors, explained that politicians across the globe have been unwilling to allow the normal business cycle to play out because of the short-term impact to growth and unemployment. Chairman Bernanke and other Fed officials are intent on fighting deflation through a zero interest policy and quantitative easing programs - both which have helped drive the gold price to new record highs.
Isaak argues that the downside of the economic cycle must be allowed to manifest itself. It is essential that excess inventories are eliminated, bad companies and management teams are dismissed, and most importantly, bad debts are written off. Eventually the economy reaches a tipping point where the impact of additional debt does little to stimulate growth, and government revenues are unable to offset the compounding interest on the debt. The levering up of public balance sheets to compensate for the vacuum in private demand is creating a bubble in sovereign debt. Investors have increasingly shifted assets into gold and investments tied to the gold price in an effort to protect their assets from an onslaught of currency degradation.
In reference to Noble-Prize winning economist Paul Krugman’s article in a recent New York Times Op-Ed titled “The Third Depression,” Isaak refutes the argument that more government spending is needed to aid the economic recovery. Instead of more spending, which Isaak views as “completely wasteful,” what is needed is a less intrusive government that does not confound companies with its ever-changing tax policies and ad-hoc, unsustainable stimulus programs. Instead, if the government were to credibly demonstrate that it can “control their spending, balance the budget, and generally return to the real principles of capitalism,” Isaak wrote that it would “instill renewed confidence in citizens and thus they’d be more likely to resume a more normalized pattern of spending behavior.”
While not discussing the implications for the gold price, Isaak concluded his argument by stating that the economy is nearing a stake in the road where difficult decisions have to be made. Unfortunately, the “worst part is that Congress and the President are ignoring the warning signs that are screaming red lights at us, while pushing forward with an agenda that’s clearly at odds with the desires of the people.” If the government continues down the same path, the economy is likely to worsen considerably, according to Isaak. In such an environment, the gold price is likely to remain one of the main, and only, beneficiaries.
