An Analysis of the Causes of the Current Plunge in Gold

From the daytime of April 12th, international gold bullion fell sharply, and fell again on April 15th and 16th. The gold contract on the New York Mercantile Exchange in June fell by US$140.30 on Monday, a drop of 9.3%, the largest since 1983. The daily drop, which settled at $1,361.10 per ounce, was the lowest closing price since February 2011 for the main contract.

As of the early morning of the 16th, the gold price has fallen by 26% from the high point in August 2011. This not only means that the gold market has actually entered a bear market, but also indicates that the bottom of the gold price is still far from coming.

Many people do not think so. They said: Gold still does not have the conditions to take the bears. Many central banks will continue to increase their holdings due to fears of high inflation expectations in the future. Although the Fed is clamoring to withdraw from quantitative easing earlier, Bernanke still insists on not watching. The unemployment rate will not be reduced to 6.5 percent, which is a difficult target to achieve. On the contrary, more central banks will further implement quantitative easing, such as the European Central Bank. Therefore, the proliferation of global liquidity in the future is a high probability event. Then, we cannot easily predict the price of gold.

However, I believe that the biggest reason for this round of gold slump is not the Fed's deliberation on when to withdraw from QE3. It is even more unlikely that Cyprus will sell 4 tons of gold, and it is not directly related to the unexpected slowdown of the Chinese economy. Instead, the global economy will enter a Long period of low inflation and low growth.

Why is the global economy going to have low inflation and low growth in the future? The general environment of low inflation is due to the fact that the fundamentals of traditional energy prices have been staggered for a long time. The fundamentals of unconventional energy have broken out in the United States, and China will soon face the same Energy **, which will continue to suppress traditional energy prices. However, once the "energy depletion theory" goes bankrupt, not only conventional energy will lose its background, but also the global geopolitical risks will be greatly reduced, and gold will lose its significance as a strategic reserve. In the future, more central banks will probably not increase their gold reserves but will reduce them, especially after the People's Bank of China recognizes this point.

The background of "low growth" is mainly related to the economic slowdown in emerging market countries. The structural adjustment of China’s economy has actually started, real estate investment will drop sharply in the future, and other investments will be difficult to top. The deceleration of the Chinese economy is a big test for the sustainability of the weak global economic recovery. At present, the European debt crisis is endless, and the Eurozone economy will hardly realize positive growth in 2013. Japan is slightly better, and a 0.5% increase is good. The US economy is a bit better, but 2013 is a strategic adjustment period. In short, the global economic low growth expectation has already formed.

In short, low inflation and low growth expectations will not change, and gold will not be able to emerge as a bull market.

There are two major reasons for the collapse of gold:

First, the technical aspect has long been exhausted. After the Fed released QE3 in 2012, the price of gold did not exceed 1,800 U.S. dollars. At that time, a strong adjustment signal was issued. However, the overwhelming majority did not care. On the contrary, the market mainly used QE3 to include the Bank of Japan later. The ultra-loose theme, trying to get more people to take the plate. As a result, the timing of the current fall in gold occurred precisely after the Bank of Japan announced a super-loose measure of US$1.4 trillion. When gold fell below 1,650 U.S. dollars, it actually issued a bearish signal, but many people were still kidnapped by the expectation of the gold super bull market, and they continued to grab rebounds and took the lead.

Another reason for the plunge in gold and silver is the shift in the focus of the global investment goods market. The author believes that the main target of liquidity attack in the future will be the stock market with greater relevance to the recovery of the real economy, rather than gold.

This round of gold and silver plunges, although it also caused a decline in commodities and the stock market, their nature is completely different. Gold is the beginning of a bear market, and other investment products markets, especially the stock market, are just normal adjustments.

The type of speculation in the future market will not be gold, and it may well be the stock market. Anyone who likes gold investment must remember that gold has almost no industrial use (previously, most of them can now find alternatives). It is a real investment product. Some people make money, and many people lose money. Therefore, this market will certainly have a short-term market, and it will definitely have a plunge. Once the main power has been abandoned by profit, there is no long period of adjustment and it will not be the "liberation army."