What is up with the gold price?

The first two months of 2013 have erased gold’s price gains from 2012.

So what? The gold market is a bumpy ride. Are you sure you are man enough to own gold until Great Depression 2?

If you’ve been buying gold coins throughout the last decade, you probably don’t even care much about the current situation. You might even welcome a bit of weakness in the market as a chance to get more value.

I’ve been telling people to buy and hold gold coins for ten years. I still recommend doing so. The latest developments in the gold price don’t upset me much. I barely think about it.

Late-comers to the gold scene are the ones who are stressed out. You might be upset if you purchased your first gold coin last year, or bought into some gold ETF at the mid-2012 lows. You’ve heard bullish predictions for $2000 gold, $2500 gold, $3000 gold, but you’ve seen the price action over the last 12 months. You hear all the news stories reporting bearish sentiment on gold, and you worry. Your “Get Rich Quick” scheme has failed.

People get frightened when their holdings fall 5%, 10%, and 20%. I consider price changes, even big price changes, to be normal. But then again, most of my trades are in highly speculative stocks that frequently rise or fall 20% in one day. So price volatility upsets me less than most.

I would not be surprised if gold fell another 20% from its current point. Actually, I predict this will occur within a year. Recession will drive down asset prices. Asia is in recession. Europe is in recession. The US is going into recession. As the US goes, so goes Canada.

Also critical is Federal Reserve policy. Much has been made of the Federal Reserve minutes from February 21, where it was suggested the economy was improving and the size of their bond purchases may need to be “adjusted” — which was interpreted to mean “lowered.” I don’t think this holds much meaning. It’s just talk. The Federal Reserve has no “exit plan” prepared.

Instead, it is highly significant that the Federal Reserve did not inflate last year. In terms of gross open market operations, the Fed was busy. But on net, the balance sheet did not increase. This puts downward pressure on gold’s price. QE3 is now underway, but gold’s price already jumped last year in anticipation of the inflation that would create.

Other central banks are inflating and buying gold — mainly Asian central banks, and Russia. The trend indicates these purchases will continue — but in the grand scheme of the gold market, these deals are small. Japan’s central bank has gone into “suicide mode” and seems eager to ruin the yen.

Bernanke recently testified in Congress that interest rates had risen and that indicated improvement in the economy. Let us assume that is true — what interest rates have risen? Two-year to 30-year rates have been falling. Only the shortest-term rates have risen, and not significantly. 90-Day went up five-hundredths of a percent in February, and nobody cares.

The economy is getting worse, not better. Central banks’ money printing will become more frenzied.

Don’t worry about short-term fluctuations in the gold price. If you believe that there will be long-term worldwide mass inflation, then you should continue to accumulate  gold coins until it comprises a significant (25% to 40%) of your net worth.