Was anyone else suspicious that gold fell nearly 2% the day after global central banks banded together to pump billions of dollars into the global financial system? With gold such an important financial barometer, there are two ways to interpret the yellow metal's recent price fall.
Firstly, the cynical view. There is increasing evidence that the gold price is ‘managed' – to put it politely. There is a massive short position in the gold futures market, which means someone with very deep pockets is betting on the price of gold falling. These pockets must be deep because the short position has been growing larger over the past few years, even as the gold price has been rising. This means someone is increasingly adding to a losing position. Ouch.
Why would anyone be short gold in the midst of a credit crisis where central banks are intervening regularly to boost liquidity? After all, gold is a currency and effectively a barometer of fiat currency strength or otherwise.
The cynical viewpoint then is that ‘someone' is selling gold to mask the dire state of the international financial system. A rising gold price in the current environment would signal that something is seriously wrong.
The other viewpoint is that the recent price decline is purely the result of a freely traded market. If that's the case then central banks should also be worried. The credit bubble is deflating with is leading to deflating credit markets. The central banks are trying to reverse this by adding huge amounts of liquidity to the global banking system.
In effect, they are attempting to ‘inflate' the system. If we take gold's fall at face value, the markets are saying that the recent coordinated liquidity injection was not enough.
Whatever your viewpoint, things aren't looking too good for the world's monetary authorities.
