The path of gold prices leads to plenty of questions. I'll go over two of the questions I received from some readers.
This is one of those topics that are always changing. Updates are usually required. But it is also an excellent example of why it is so important for all of us to improve our own financial literacy.
And it is vital that we impress upon the next generation that they too must not simply turn their hard-earned money over to an "asset manager" and let them do as they wish with the cash. In too many instances these managers manage to lose a big chunk of that money. But much like the federal government, it isn't their money so they don't worry about it.
Why do gold prices go up and down so much? And do I think gold and silver will be confiscated by the government? I'll attempt to answer both queries throughout this page and give you some historical background along the way. Silver prices are affected in the same ways as gold.
We'll start with the question about confiscation or to be more accurate, nationalization of gold and silver. Franklin Roosevelt didn't actually confiscate American's precious metal during the Great Depression. He did pretty much demand that people turn in their gold and silver.
He paid those who followed this dictate $20.67 per ounce. About a year later he decided the price of gold would be $35.00 per ounce. In effect he cut off 40% of the value of the dollar at that time. Sort of a prelude of things to come in terms of government manipulation of currency.
Of course he had "good reasons." He intended to spend incredible amounts of public money over the next several years. And he needed to prevent people from turning in their paper currency for physical gold. Fractional banking was firmly in place even back then. The banks didn't really have all the depositors money!
Today while it is still possible to see a scenario where people distrust the American dollar so much, that they would dump the paper for gold or silver bullion, it is not as likely to see another nationalization. If and when gold prices reach a level where the general population moves toward owning gold or silver coins, a better bet would be a very large tax on any precious metal. Governments love to tax.
In the books-empower news section, located in the left margin of every page, you'll find current precious metals reports.
The question about gold prices rising and dropping so fast and far was brought on by events that trigger these sudden fluctuations. All markets are susceptible to emotion and trust. Gold and silver maybe more so than others.
Over the last decade we've seen incredible variances in precious metal prices. During that time we've witnessed first hand, the elements that lead to such changes.
Gold prices and silver prices began their big run up due to overall market conditions such as nagging unemployment, a stock market crash, a housing bubble crash and a credit bubble crash. Toss in massive government spending and a glaring lack of perception by elected officials and their appointees and you get a situation where precious metal prices go up. Just like in similar times in history.
This does cause concern among government position holders. And central banks. Including the federal reserve system, which is the U.S. central bank. The federal reserve is locked into keeping interest rates very low. They will continue to keep buying up debt at least for a while.
A while back, Richard Fisher, president of the Dallas branch of the FED, reported in regard to restoring growth in the housing industry, "It is mission accomplished." Seems like the last time I heard an official use that phrase, it came back to haunt him.
The federal reserve didn't see the housing bubble collapse coming the last time. In fact Ben Bernanke stated that he saw no concern for such a collapse. Right before it happened. They still don't get it.
Those of us in the mortgage industry could see it coming years before it actually arrived. There was no way the fundamentals supported such a growth pattern. And there is no way to consider the housing market restored now. It is still about jobs. Until the real job market goes up, and I mean really up, housing cannot fully recover.
The federal government still doesn't accurately report the jobless numbers. To do so would validate any concerns about their effectiveness or lack thereof.
The federal reserve is part of the media blitz that sends out information that leads people back to the stock market. Or even better the bond market. Which sends more money flowing in to the big banks. That effects gold prices.
Lets look at Goldman Sachs. They were founded in 1869. They advertised themselves as a leading global investment banking firm.
They were also one of the biggest banks involved with packaging up bundles of sub prime mortgages and reselling them on the secondary market. They made millions on these worthless loans. Then it started to unravel.
In 2008, just in time to save them, the New York branch of the federal reserve approved a change in the legal status of Goldman Sachs from an investment bank, (as they actually advertised themselves), to a bank holding company. Why you ask? Because bank holding companies would be eligible for a federal bailout. Investment banks were not. Curious how the federal reserve is right in the middle of all these types of backroom dealing. Do you remember from the page about Jekyll Island how the real goal is to keep the big New York banks in a dominating position?
So Goldman Sachs received $10 billion in bailout money.
Barry Ritholtz wrote a fascinating book titled "Bailout Nation." His book details how Goldman Sachs helped such lenders as Long Beach, Fremont and New Century bundle very high risk loans and then sell them down the road.
Goldman Sachs later had to pay a $550 million fine for misleading investors. They use similar tactics when they advise their investors to sell off gold. This will for a time, drive down the price. Which will create buying opportunities. With lower gold prices, they can tell their clients to buy gold. Two commissions. I'd take anything from this dubious company with a grain of salt.
The markets however, do pay attention. When Goldman Sachs makes a projection on the long term direction of gold and silver prices, the fluctuation returns.
There was news about Cyprus selling their gold to pay off debt. This also affects gold prices. More sellers than buyers means lower gold prices. Please realize the European central banks are intending to force nations in debt and holding large gold reserves to sell them.
Peter Schiff, CEO of Euro Pacific Capitol addressed this issue at that time.
“The European community is trying to force Cyprus to sell-off its gold…and now you have the anticipation that other highly-indebted European nations like Greece, Spain, Portugal, and Italy, that [all] have lots of gold, [will have to do the same]. Portugal has I think 90% of it’s reserves in gold—that’s about the highest in the world…[So] these countries [being] forced to sell their gold has really [spooked] the market, and people are selling in anticipation of this avalanche of selling by European central banks…[but] that’s a false idea…The reality is none of that gold is going to be sold into the ‘market’…[because]the ‘buyers’ will be other central banks.” Those "other" banks will come from emerging powers such as India, China and Brazil.
Understand that western central banks do not want gold prices to go up. Not long ago most of them sold gold off in record volumes for about $500 per ounce. The Bank Of England sold gold reserves for $300 per ounce. What message would it send about their financial acumen if they started to buy it back for $1500 per ounce. No way. They will do all they can to convince people not to buy gold or silver.
Again the cycle repeats itself. If the general public decides to trade in worthless fiat currency for gold or silver, the big banks are toast.
Below you'll see a great, (short) video which will help to further explain what you've read here. Take the emotion out and look at fundamentals. Remember "Cui Bono". We talked about that Latin phrase in a couple other pages. Of benefit to whom. The big players will talk down gold because they know those prices will go down. Then they will buy those lower gold prices.
The emerging markets are buying up gold and silver in record numbers. The western charade can only go on for a certain time. Be sure you analyze the facts and make clear decisions. Here is a list of "common" reasons for gold price fluctuation.
In the resource library you'll find six videos that provide amazing insight into the way currency flow really works and how it is controlled by central banks.