Gold market recently saw a "crash" last week. Not since 1980 had we witnessed a one day fall like this. But was this a surprise? I bought some gold coins between 2005 and 2007 between $598 to $750 from bulliondirect.com (I regretted buying it for $750 but I was new - it was a lesson). Then since the great recession when Fed started pumping money in to the market and investors still afraid to invest anywhere, prices in gold went up due to high demand. This high demand was due to high expectation of inflation due to fed's actions, aversion to hold cash and aversion to invest in stock or bond market (consider current yields in the bond market). So gold went up. But at the end of the day, it is just a commodity. Its price is determined by supply and demand. In 2011 I sold my gold around $1550 per coin.
The reason I sold my gold was because all signs pointed towards gold being over priced. It was clear that Feds actions and high risk equity market was driving prices up. But some day that was going to end. Nobody knows when that will happen. I don't either. If I had known then I would have preferred to keep my gold and sell them when it reached its peak over $2000. But there was one thing I knew for sure. That gold is over priced and it had to come down to its real price. What is that real price? I wish I know. But Fed is still pumping money - to the tune of $85B per month. Interest rates are still low. When that changes, QE3 ends and interest rates go up, investors will take out money from gold and buy securities that offer higher interest or perhaps invest in stocks assuming Feds assistance will accompany a better market (for a given risk you'll have better returns than now). This means investors will sell their gold, thereby increasing the supply of gold and reducing its price. A strong dollar will also mean that gold which is traded in dollars should be adjusted for new price of dollar. How much will that price be. I don't know. We'll sit and watch. But I am not touching gold until Feds fund rate is at a level where Fed says we don't plan to increase the rate anymore (I think its going to be around 3.5 to 4%).
The reason I sold my gold was because all signs pointed towards gold being over priced. It was clear that Feds actions and high risk equity market was driving prices up. But some day that was going to end. Nobody knows when that will happen. I don't either. If I had known then I would have preferred to keep my gold and sell them when it reached its peak over $2000. But there was one thing I knew for sure. That gold is over priced and it had to come down to its real price. What is that real price? I wish I know. But Fed is still pumping money - to the tune of $85B per month. Interest rates are still low. When that changes, QE3 ends and interest rates go up, investors will take out money from gold and buy securities that offer higher interest or perhaps invest in stocks assuming Feds assistance will accompany a better market (for a given risk you'll have better returns than now). This means investors will sell their gold, thereby increasing the supply of gold and reducing its price. A strong dollar will also mean that gold which is traded in dollars should be adjusted for new price of dollar. How much will that price be. I don't know. We'll sit and watch. But I am not touching gold until Feds fund rate is at a level where Fed says we don't plan to increase the rate anymore (I think its going to be around 3.5 to 4%).
