What Should I Do in Response to the Sharp Steep Decline in Gold Prices?

Even after this sharp, steep decline in gold prices, I am still very confident that after this correction ends that gold will go much much higher. Gold has increased volatility these days because of all the hedge funds that pump and dump commodities such as gold. Recently I’ve already read of numerous hedge funds that were forced to close due to millions of dollars they have lost for investors based on their speculative bets. Prior to the Gold ETF coming into existence just a couple of years ago in the U.S., it was difficult for hedge funds to speculate on gold in huge positions. Unfortunately, now it is not. And unfortunately, gold, already a traditionally volatile asset, has become more volatile because of this.

Ever hear the saying, “Buy the rumor. Sell the news”? In fact this is a strategy I often use with options when I decide to dabble in them though I never use this strategy with stocks (only because I don’t trade, I invest). In the case of gold right now, it makes sense to “Sell the rumor. Buy the news”. Gold has declined sharply because recently there have been many rumors that central banks have been selling gold. In fact, though it’s always close to impossible to pinpoint the exact origins of rumors, I wouldn’t even be surprised if central banks themselves are releasing these rumors to drive down prices so that they can purchase at their desired price. Currently it’s impossible to confirm the reliability of these rumors because central banks all over the world make it as difficult as possible for you to know exactly what they are doing with their gold reserves.

They use non-GAAP approved accounting principles to account for gold on their balance sheets, they report their gold reserves on a two month time lag, and even in the instances where you can look at monthly changes in gold reserves, they report changes aggregately for global regions, so you still can’t tell what country’s central bank is selling and which one is buying. People that believe that their country’s central bank acts in their best interests are just like Neo from the Matrix before he took the red pill. They have no idea of what reality is.

For gold in this case, since everyone has been selling the rumor, my guess is that the news will reveal most central banks will actually have increased their gold reserves. If this is the case, then you should buy the news. Though there have probably been central banks that have been selling, it may still be impossible to tell how much due to the non-GAAP, not-accepted-anywhere-in-the-world-but-at-central banks-accounting procedures of accounting for leased gold that they don’t own as “assets”. Furthermore, I’m convinced that central banks collude to drive down the price of gold at certain times.

Just google the “Washington Agreement” and you will discover that an agreement to sell controlled quantities of gold among all the world’s central banks already exists. But the reason I believe the collusion runs much deeper down the rabbit hole than just the arrangements revealed in the Washington Agreement is because of the particular actions of certain central banks such as the Bank of England. The Bank of England helped to keep gold artificially low in 2002 by selling more than half of their gold reserves when the price of gold was almost at its bottom. I’m convinced that no central bank could be so stupid as to unload gold at its absolute bottom in transactions that cost them more than USD $4 trillion in losses (when compared to today’s price). Thus I believe that the Bank of England’s actions were driven by the requests of other central banks, the IMF, the World Bank or some combination of the these three entities in a plan to keep gold artificially low during that time. That is the only rational explanation for such inexplicable behavior.

Stephen Roach, the chief global economist at Morgan Stanley in New York, said this week that “the mega-run for commodities has run its course”. I know that millions of people sold commodity-based stocks and commodities including gold based upon this singular statement and will no plan on re-entering the commodities market. I don’t really understand why the thundering sheep herd places so much faith in global investment firms and their statements. If you read my blogs posted under Investment Psychology then you already know that I don’t hold the public opinions of global investment firms in high esteem based on my belief that all major global investment firms intentionally deceive and defraud the public. If there is anyone’s opinion I would pay closer attention to, though, it would be the chief economists/strategist at Goldman Sachs.

Why? Because, for years, they have had a direct line to the United States Treasury. With former Goldman Sachs CEO Henry Paulson assuming the position of U.S. Secretary of Treasury this past July, their proud tradition of having a direct line to the U.S. government’s most important economic offices continues. Furthermore, it appears now that President Bush will now appoint Robert Steel, another high level Goldman Sachs executive, as the U.S. Treasury Undersecretary for Domestic Finance. Thus Goldman’s access to inside information about gold prices and the U.S. economy will soon be even further bolstered.

James Gutman, senior commodities economist in London at Goldman Sachs Group Inc., stated that he viewed the steep drop in commodities not as the end of the bull run, but as buying opportunities, strongly dissenting with the view of the Morgan Stanley chief global economist. Although I am sure that Goldman Sachs always knows in which direction gold is headed, I don’t always trust that they always truthfully disclose what they know. I believe that many times they do not disclose what they know and use it for their benefit only. However, this time, Mr. Gutman appears to be stating Goldman’s true point of view.

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J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. He is the inventor of the revolutionary MoneyPing™ investment strategies, a novel approach to learn advanced wealth planning techniques, and how to build wealth, not just dreams.

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