Why Gold Prices Took a Hit Last Week

Gold prices hit their lowest levels in five years last week, trading below $1,100. What was the real driving factor behind the price's decrease?

Without a doubt, many will use recent developments in the global economy as an excuse. The Grexit no longer looks like a certainty thanks to a bailout of questionable sustainability. China's gold cravings seem to be lesser-than-usual. There's also the looming threat of an interest rate hike and a subsequent strengthening of the dollar.

Yet, upon further examination, none of these seem to be the guilty party that sent gold plummeting. China's gold demand is strong despite day-to-day deviations, and the U.S. rate hike isn't nearly as 'around the corner' as many believe. Most importantly, perhaps, gold is fundamentally different from other commodities, having different demand drivers.

Instead, Mining.com's Frik Els points out two recent events that he refers to as a 'one-two punch that floored gold price'; one from the U.S. and one from China.

Els argues that the U.S.'s part in gold's fall came via speculators in the Commodity Futures Trading Commission slashing their net-long positions, with managed-money accounts significantly reducing their exposure to gold futures. Many of these sales came as a result of uncertainty regarding the direction that the gold market is heading in.

Similarly, Els notes that China played its part by performing a massive gold sale worth $2 billion in just a matter of minutes. Due to its size, the Monday Shanghai Gold Exchange sale of 4.7 tons immediately caused gold to drop by 4.3 percent – gold sales usually average no more than 96 kilograms a minute on the SGE.

Els adds that these seemed an "almost concerted cross-continental effort to push price through support levels that the metal has bounced off numerous times before." Yet despite these drawbacks, gold still managed to bounce back to $1,100 almost immediately.

While such falls in the price of gold are universally viewed as negative, many buyers still see them as little more than a buying opportunity. As gold fell by over 3 percent in both India and Turkey, consumer interest in these markets grew – the metal's low correlation with other assets makes it ideal as a safety-net investment to diversify one's portfolio.

---

For all the latest news on precious metals be sure to Like Us on Facebook

5 Popular Myths About Gold, And Why You Shouldn't Believe Them

There's plenty of misinformation in the public domain about investing in gold and silver. Here are some reasons to be skeptical.

Stefan Gleason of TheStreet recently tackled the five most common gold myths, why they are wrong, and how this misinformation can cause investors to shy away from gold. Gleason lists the myths as follows:

Myth #1: A rise in interest rates will cause the price of precious metals to go down.
Analysts who support this idea ignore the fact that gold and silver had a successful run in the late 1970s, when interest rates were steadily on the rise. Gleason argues that only real interest rates affect the price of precious metals; as long as these are below the rate of inflation, and thereby considered negative, gold prices will likely be strong.

Myth #2: The possibility of government confiscation.
The 1933 Executive Order by President Franklin D. Roosevelt, which ordered U.S. citizens to exchange their gold bullion for cash, was not nearly as far-ranging as many are lead to believe. The government did not seize bullion kept in citizens' homes, and while there was some minor confiscation of bullion from safety deposit boxes in failed banks, another raid of this type is highly unlikely given that the dollar is no longer on a gold standard.

Myth #3: Numismatic coins are "confiscation-proof".
Often perpetuated by dealers of rare coins, the simple fact is that no law says that numismatic coins are not at risk for confiscation. In fact, Gleason suggests American Eagles as an option to consider, saying, "They are considered to be legal tender coins in the U.S., which would seem to provide at least some legal barrier to any potential gold prohibition effort."

Myth #4: Mining stocks can offer greater gains than bullion.
Gleason writes that gold and silver bullion is notably safer, as it experiences much less severe downturns than mining stocks. He adds that "while mining stocks can be attractive at times for speculators or traders, they aren't suitable for most buy-and-hold investors."

Myth #5: The possibility that greater powers are keeping gold's price down.
Price manipulation occurs in all asset markets – not just in the gold market – meaning that no asset class is completely immune. Regardless of whether there is large-scale manipulation or on a smaller level by a few rogue traders, the constant industrial demand for precious metals will likely always make them a safe investment for the "little man" who avoids future markets and owns actual bullion.

---

Did you know we're now on Instagram? Follow us here.

Photo Credit: Allan A. Blanco via Compfight cc