The price of gold was off by nearly 5% yesterday, with comex gold losing over $97 an ounce on an intraday basis. This price collapse is comparable, in percentage terms, to the carnage seen in other precious metals, but well beyond the damage seen in other ‘risk’ areas of the marketplace (i.e. commodities and equities). Accordingly, the question deserves to be asked: why is gold outpacing the recent decline in other ‘risk’ areas of the marketplace?
As you would suspect, there are numerous speculations to draw upon. For starters, precious metals lease rates, which as we know allow powerful interests to more readily manipulate gold, have been sliding of late due to European banks scrambling for dollars. Falling lease rates, as a basic rule, imply that it is easier for other banks to borrow gold and short/push the price of gold lower. Next, there is the idea, taken from Tuesday’s dull FOMC statement and some of many quotations coming out of Europe, that deflation could be a lesser evil than inflation in Europe. Although this outlook could drastically change tomorrow, it nonetheless seems to have played a role in dampening investor’ appetite for risk. Finally, there are the usual suspects: the strengthening dollar sent gold lower and as gold broke through key technical levels the weak hands started to flee and ‘forced selling emanated from the hedge-fund world’.
These points noted, what no one in gold land is doing is blaming Ron Paul.
‘End The Fed’ or End The Gold Bull?
On the surface, there is no larger political supporter of gold and precious metals than Ron Paul. After all, Paul’s investment portfolio is heavily slanted towards gold, Dr. Paul’s image was once (illegally) emblazoned on precious metals coins, and he has constantly – since Nixon closed the gold window – championed gold as being real/sound money. Yet despite being pro-gold, what should be remembered is that Paul is, first and foremost, anti-fiat or anti-Fed. In other words, if given the power Paul would abolish the Fed, which, in Austrian-speak, would stop the inflation that serves as one of the major engines behind skyrocketing gold.
This brings us to the rather extreme speculation that Paul’s recent surge in some polls could be adding some pressure to the price of gold. Did any gold bugs take notice when Paul posted a ‘big increase’ in Iowa?
In short, Ron Paul is the only politician within striking distance of the Presidency that offers any hope that the dollar can be salvaged as a viable currency longer-term. Despite being one of the only politicians that has spent 40-years accumulating gold, if the highly principled Paul actually did get elected he would undoubtedly adopt policies that harm his current investments. President Paul would balance the budget, rein in the Fed’s printing presses…and gold would likely collapse to levels most do not think is possible.
As for the difficult question of why gold has outpaced the recent decline in other ‘risk’ areas of the marketplace, it is worth remembering that gold has raced ahead of all areas of the marketplace for many years now. There is nothing inherently dangerous about a healthy pause in the ongoing precious metals bull, so long as central banks, when tempted to do so, remain free to print.