Why Gold Prices Crashed

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The past ten days, all of us know that gold prices have slumped. Here is an insight into the why’s and how’s of it.

Stock and Commodity markets still run under the age old demand-supply theory. And Gold prices fell due to the excessive supply of Gold in the International Market (especially US) and India primarily relies on imports for Gold.

   1.      With the US Economy in the recovering phase, the investors have once again found the equity market attractive and are moving away from gold, which they considered as a safe-haven investment. This has led to the rising supply of gold in the commodity market.
  2.      The investors are also selling the gold they own in paper, forcing the Exchange Traded Funds (ETFs) to sell their gold stock to buy back these papers.

However there is a conspiracy theory, which is more interesting and which better explains this abrupt fall.

This was schemed by some large banks and hedge funds in US who were running short of gold for making delivery against their future contracts. Since future contracts come with a pre-determined price and this price was quite high as these were entered into some 3, 6 and 12 months back when gold was expensive, the only way for these banks to gain is to buy cheap. So, what did they do?

They chose a date, which was 12th April 2013 and sold about 3,68,000 future contracts to sell gold in the Commodity Exchange of New York through large traders, creating an illusion of excess supply of gold in the market. 1,140 tonnes of gold were sold in a single day, which is more than the annual gold demand of India or China (the largest importers of gold in the world)

Prices began falling on the commodity market and large holders of physical gold are left with no option, but to sell gold futures to protect themselves from further fall in prices. The gold market collapsed and the prices dropped. This technique is called “Beat the Beehive” – i.e., beat the hive, create chaos and feed on the honey.

As one can understand, the fall in gold price was due to the illusion created and illusions are not permanent. However the effects will last some time before recovery. The yellow metal has not lost its worth, and will continue to rise gradually and the prices will settle at a stable point.

And as far as buying gold is concerned, “Make hay while the sun shines”  




Location: Chennai

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