Gold gets slaughtered as deflation fears arise

Prices plunge as economic turmoil in Europe and the US sends investors piling into cash.

By TheStreet Staff Nov 21, 2011 3:28PM

Image: Gold (© Anthony Bradshaw/Photographer)TheStreetBy Alix Steel

 

Gold prices sank Monday with investors opting for cash as the congressional supercommittee failed to deliver and deflation fears jumped to the foreground.

 

Gold (-GC) for December delivery tanked $46.50 to settle at $1,678.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,727.40 and as low as $1,670.50 an ounce while the spot price was losing $50, according to Kitco's gold index.

 

Silver (-SI) shed $1.30 to finish at $31.12 an ounce while the U.S. dollar index was up 0.4% at $78.30.

 

Gold prices were in free fall Monday as budget talks in the U.S. broke down and as borrowing costs for Spain soared. A new conservative government led by prime minister Mariano Rajoy wasn't helping alleviate Spain's 10-year borrowing costs, which were climbing to more than 6.5%. The euro was falling against the dollar, which was pressuring gold by making the dollar-backed metal more expensive to buy in other currencies.

 

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Gold also plummeted past the key support level of $1,680 an ounce with options expiring on Tuesday, which can trigger a lot of rebalancing and more volatility.

 

"It looks like the $1,680 area is the biggest open interest," said Stephen Eubanks, director of institutional sales trading at Mr. TopStep. "I don't think that there is any time where you can say it won't be volatile . . . you need a seat belt to trade this stuff." The gold ETF, SPDR Gold Shares (GLD), however, actually added 4 tons on Friday, which signals that a lot of the downward pressure on gold is coming from the futures market.

 

Further complicating matters for gold is the reality that the U.S. debt super committee, charged with slashing $1.2 trillion from the deficit over the next 10 years, most likely has failed. The Dow Jones Industrial Average ($INDU) was down more than 300 points and investors were dumping gold for cash, fleeing to the perceived safety of the U.S. dollar.

 

There are worries that a failure to reach an agreement might open the door for another downgrade of the U.S.'s credit rating, as Standard & Poor's cited dysfunction in Washington as a main reason for its negative outlook. During the week after S&P issued its first-ever downgrade of the U.S. at the beginning of August, gold rallied almost 5% on haven buying, but for now the need for cash is winning out.

 

"It's viewed as a safe haven as a dollar-denominated asset," said Eubanks, "but it doesn't mean it can't go down." Eubanks said there are a lot of investors and traders in the market looking for an upside move, which means they might be the first to bail out when prices tank.

 

Jim Cramer, on the flip side, wrote that now is the time to stay invested in gold and to be buying. "Yes, it is true that a severe recession in Europe is bad for gold, but we had one here and how did gold do? It went up, not down," he wrote.

 

Investors dumping gold for cash signals that deflation is more a concern than inflation. Investors fear that the European Central Bank won't be the lender of last resort, that Europe will slip into a recession and that automatic deficit cuts in the U.S. along with the expiration of the payroll tax cut and unemployment benefits will also trigger a recession. Societe Generale wrote that losing stimulus could shave 1 to 1.5 full percentage points off of growth in 2012 and that automatic spending cuts could reduce growth by half of a percentage point in 2013.

 

With dismal growth forecasts, gold is less attractive to own. However, David Morgan, founder of Silver-Investor.com, said he sees a rally starting in the first quarter of 2012 as inflation winds up trumping deflation.

 

"I am pretty convinced that this is going to be an inflationary bailout and that we are going to have to get back into the market in all sectors," Morgan said.

 

In the meantime, he is bullish on gold unless prices break below the $1,550 level, and thinks that gold will find some meaningful buying in the $1,600 area as gold bulls buy at "discount" prices.

 

Gold mining stocks were getting pummeled with broader equities Monday. Barrick Gold (ABX) was sinking 2% to $47.88 while Newmont Mining (NEM) was down 0.8% at $64.91. Goldcorp (GG) was falling 2.3% to $49.40 and Randgold Resources (GOLD) was tumbling 4.3% to $106.21.

 

26Comments
Nov 21, 2011 4:52PM
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Sorry, 2% to 5% is not tanking. Free fall ? That could easily apply to the stock market - more so than for Gold. What happens when the U.S. debt gets downgraded? Please avoid hysteria and report the facts.
Nov 21, 2011 5:06PM
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A drop of 2.3% is considered 'Slaughtered'?  Really.  What is 4% then?  Manured?

 

Love the continual over-reacting by these cow-brained journalists writing content that doesn't even deserve to be used as floor covering in the barn.

 

I guess when all of the manipulators have finished shorting the market this week to make their millions, look for the recovery (I guess gold will be "resurrected") next week as they buy back to cover their short positions.

 

When gold drops $400 in a day, then slaughtered may be a more appropriate description.

 

 

Nov 21, 2011 6:21PM
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I'm sorry, but I just don't see how the "super-committee" failure is such a big deal.  Everyone with a brain should have expected that the spending cuts were not real.  That leaves tax increases.

 

Regardless of your economic leanings (supply-side v. Keynesian), you have to figure that any tax increases would be a disaster.

 

Going forward, we're supposed to have defense and Medicare cuts.  Does anyone believe that either of those are actually going to happen?  Remember, they don't start until 2013.  Why do you suppose that is?  Realists would conclude that a year is needed to rescind them.

 

As for our credit rating.  Only a rating agency could downgrade our credit rating.  All our debt is payable in dollars.  We can print however many trillions it takes.

Nov 21, 2011 5:01PM
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Cramer's comment about recession being bad for gold price doesn't make sense to me. Gold rises because people lose confidence in paper currency. The US Fed has greatly increased the dollar supply causing the dollar to fall (that's why oil is over $100 despite falling demand). The Euro also is losing value because of sovereign debt by so many EU member nations. One day's move up or down on gold should not cause analysts to make stupid remarks. A comment on deflation: governments LOVE inflation- it bails them out of their over-spending by enabling to pay debts with paper that is worth less in the future. That's why you hear these horror stories about deflation. As a retired person who has saved a significant nest egg, I would like to see some deflation. It might be the only way to force our government to rein in the outrageous spending.
Nov 21, 2011 5:46PM
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Oh hell, its only down $45.
$hit, its over inflated way more than that. It could go another $700.

Nov 21, 2011 5:07PM
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I love how they trash gold and other commodities.

 

Tomorrow, next week, whenever....they will praise it equally high to the skies when inflation fears rise.

 

Gold and silver are continually bought and sold as it is one of the few commodities from which ready cash can be had when needed.  Give credit for its liquidity.

 

These reporters and their rhetoric are pathetic, readers.

Nov 21, 2011 5:51PM
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Gold and Silver belong in strong hands, they always have.  its the futures traders that drop the prices when they sell off for a few quick bucks.  This in turn allows the long term bullion holders to buy more.  gold is not volitile, the mentality of the people trading it is whats volitile.

Nov 21, 2011 6:42PM
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It's time to throw out everyone in Washington.  Simpson-Bowles was a reasonably good deficit reduction plan, because it pretty much spread the pain.  Unfortunately, Obama and Congress ignored it and each went off in their own direction.  The Democrats are wrong not to touch entitlements, and Republicans are wrong not to include increased revenues as part of the plan. 

If nothing else, cut spending 10% across the board over the next three years and increase revenue by getting rid of most deductions and credits, eliminating the cap on Social Security and Medicare contributions, and raising the tax on capital gains and dividends from 15% to 20%. At the same time, the top corporate tax rate should be reduced to15% in order to stimulate economic growth.
Nov 21, 2011 5:15PM
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The dollar goes up and the rigged markets keep on going makes no sense that gold is going down..not to worry people...you can bet your bottom dollar that China and all the other countires are going to be buying this gift from Wall Street manipulating the price of Gold & Silver down...M11 below is correct enjoy these dips great on getting on board...the DOW would be at 7000 points if not for the intervention of Wall Street manipulating the system, we are getting closer to the End game when the paper house ponzi called the dollar burns down!..listen to Cramer lose your money...if you own the real gold & silver in hand one doesn't lose a dime if buying paper gold & silver one doesn't own gold or silver...the longer this US manipulation goes on the harder the US is going to fall....buy food guns & ammo then silver & gold.
Nov 21, 2011 6:22PM
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What are Beanie Babies going for these days?
Nov 21, 2011 7:34PM
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Who are these people that write these types of articles?

Do these people really believe that because they say it, it is true?

 

"Gold gets slaughtered "

"Prices plunge "

"Gold prices sank "

"Gold prices were in free fall "

 

Ummm gold dropped 2.7 percent.

I dunno, new math?!!?

 

"Gold mining stocks were getting pummeled with broader equities Monday. Barrick Gold  was sinking 2% to $47.88 while Newmont Mining  was down 0.8% at $64.91. Goldcorp was falling 2.3% to $49.40 and Randgold Resources was tumbling 4.3% to $106.21"

 

Seriously?!!?

 

This has been the daily MSN homepage stock brief for about the last month

Stocks plunge on Europe worries –then the next day

Stocks explode on Europe outlook –then the next day

Stocks plunge on Europe worries –then the next day

Stocks explode on Europe outlook –then the next day

Rinse and repeat.

 

Is it that they just hire anyone to fill the web with text?

 

I'm back to my post 9/11 habit of limiting my exposure to "media news"

 

Nov 21, 2011 7:30PM
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imagine that...another hyped up bubble for the speculators to harvest...they are selling to make a profit...simple as that...when the same people scare the market down enough...they will get back to buying it again with stories meant to drive the cost up...then they will sell again..and so on
Nov 21, 2011 5:16PM
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Hell, bring gold back to $35 an ounce, as it was for decades when I was a kid....
Nov 21, 2011 6:54PM
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I'll offer my "modest proposal" again.

 

Cap spending at 20% of GDP.

 

In return, the Democrats can write the budget and the tax code any way they want.  At the risk of overestimating Congress, let's assume that the Democrats are smart enough to realize that a healthy economy  will allow them to spend more to buy more votes from their constituents.

 

Any takers?

Nov 21, 2011 7:11PM
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Forget Gold

If Theres a Middle east Conflict in the Near Future

Invest in 1990 -1998 Geo Metros that net 50mpg at $2000 a pop

Before gasoline spikes to $7.00 a gallon after the Suez Canal gets Trashed

 

You'll tripple your money in 6 months Smile

Nov 21, 2011 8:31PM
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"Gold gets Slaughtered"???  It was down $46 while the DOW lost 248...  Sensationalism-perhaps.
Nov 21, 2011 8:16PM
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I believe many of the posters on here have a better grasp on our economy than MSN.

 

Commodities had a correction today, nothing more, nothing less. It is difficult to participate in currencies and markets with the excessive manipulation that the nice government men are/have been doing for so long. They put pressure on the market one day to drive it down only to reverse positions the next day and ride it up.

 

Each time a banking organization reports profits of 2 to 6 billions dollars it was done by manipulating the markets/currencies/commodities. The little investor is the one holding the empty bag at the end of the day.

 

All fiat currencies will eventually fail. How many dollars will you be holding when that happens is the only question you should be asking yourself.

 

Wake Up America

 

 

Nov 21, 2011 7:11PM
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Doe's anyone get this s***?  I thought that when the economy tanks, you have your gold to stroke to keep you happy. The economy is tanking, and gold goes down?  Another reason not to invest in any of this craziness. Go to your local credit union, and find a nice CD, and sit back and watch this crazy greed show put on by day traders, speculators, and other market manipulators to steal your money.
Nov 21, 2011 8:20PM
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I don't care what anyone says... China is buying Gold like crazy still.  When the rest of the world fails one at a time... and the onlyl solution is for China to be the new reserve currency because their money is backed by Gold, not pipe dreams and debt... then Gold might not be worth $5,000, but at least you will have something tradable for the current currency.  Plus, it might be heavy, but not as heavy as a wheelbarrow full of dollars. 
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