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Gold prices crashed 20% and the “gold doomsdayers” were going head over heels at having “predicted” it. The next few years may well prove them absolutely wrong.

14 Oct 2011

By Deepak Rangan
Gold prices crashed 20% and the “gold doomsdayers” were going head over heels at having “predicted” it. The next few years may well prove them absolutely wrong.

First of all you need to have a clear picture of what the nature of the gold trend has been over the past decade, evaluate its “crashes”, understand the current economic climate and then look for yourself. And then you may see an opportunity when others see risk.

-Gold prices peaked to $1030 in March 2008, from whence it slumped to $685 in October, a decline of 33%

-In September 2011, gold prices once again peaked at $1920, and then crashed to $1530, a decline of 20%

What one needs to understand is why these two gold crashes occurred?

It happened simply because of investors de-leveraging their positions in order to meet their liquidity requirements. As simple as that.

Nothing fundamentally has changed

-The US is still weak, struggling and reeling under high unemployment and a stagnant economy.

-The Euro zone debt crisis is not going to end in a month or two. It is here to stay.

-Global money supply in increasing by 8%-9% annually and fears of currencies depreciating will continue. And the national debts are piling up, be it the US, Europe or Japan

Gold outflows during the 2011 crash was minimal in those who hold physical positions. It was the futures market, trading on margins, that de-leveraged positions and further compounded by margin hikes.

Gold outflows in physically-backed gold ETP's just registered a nominal $100 million in September when the prices crashed. At the end of September, holdings of physically backed - ETP's remained at around $120 billion!

In comparison, the speculative futures positions in COMEX gold has almost halved from the 2011 peak hysteria.

So what does this indicate? Gold is not dead. It is just sick. The price fall shook out the “hot money” from gold but those holding physical gold remain unshaken.


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