Gold Prices Can Go Down

FT Alphaville asked if this two day decline in the price of gold was the Kiss of Death for Gold?, while Nouriel Roubini compared the recent run up to the Nasdaq bubble. Others simply noted that the two day decline gets prices all the way back to where they were... last week.



Expect more pressure over the next few days as the CME Group ups margin requirements to match the recent run up in the price of gold. Per Bloomberg:

CME Group Inc. raised the margin requirements on gold trading at its Comex unit for the second time this month, after prices surged to a record above $1,900 an ounce and then plunged today by the most since March 2008.

The minimum cash deposit for borrowing from brokers to trade gold futures will rise 27 percent to $9,450 per 100-ounce contract in the speculative Tier 1 category at the close of trading tomorrow, Chicago-based CME said in a statement. On Aug. 11, the increase by the exchange was 22 percent to $7,425.

I am in Nouriel Roubini's camp in that I do believe the gold run (i.e. bubble) will pop in impressive fashion, but I am not ready to claim that moment is about to occur when gold continues to make new highs each month. As I said back in March 2009:

I've learned my lesson with the Internet Bubble (and recent housing bubble) that most people are illogical and invest based on fear (sometimes fearing loss, sometimes fearing they will miss out on the next big thing) and money can be made even if the premise makes absolutely no sense in the long run. As long as fear reigns supreme and equity markets remain volatile, there will be plenty of people convinced gold is the only "safe" investment.

My expectation is that eventually the golden bubble will run its course and come crashing back down to earth. If the economy gets worse, people will realize you can't eat the stuff and investors will sell their stakes to pay for necessities. On the other hand, if the economy recovers, investors will have much better opportunities with their capital… as I mentioned Tuesday, asset inflation, especially in precious metals, serves no economic purpose in the long run.

Source: Yahoo Finance