Why Have Gold and Silver Fallen?

On August 11, the price of gold collapsed: down over $35. So did the price of silver, platinum, and palladium. A lot of people are asking why.

On my site’s page on gold’s daily price, I make available a five-day chart of gold’s price. On that page, you will find my commentary on gold. Beginning on the 18th of March, and posted on the 19th, I wrote that I believed gold had probably entered a bear market. That call looked as though it was way too premature, since gold’s intra-day high had been $1,037 on March 17. In the very early morning of March 17, I ran an article on my site on how to short gold to protect your position in coins.

Here is what I posted on my gold price page. If you have visited my page, you should recall this.

I think gold has entered a bear market. I posted this article on March 19, 2008:

The offsetting factor is fear of war with Iran. See my Department: War With Iran.

Just for the historical record, here is what I wrote on March 18 and published on March 19.

Gold could fall. I expect it to fall. So, you may pay a price for owning gold coins. I expect to.

If you are not willing to pay the price, you should sell all or part of them, or short gold bullion to compensate you for the loss. In short, count the cost. This is a universal rule (Luke 14:28—30).

I think the precious metals are a bubble market today. It is ending. Here is a crucial sign that it is ending. India is not buying. When Indians stop buying gold, they must be replaced by new buyers. Who might they be? . . .

One day’s move should not be regarded as a definitive turning point — not after a seven-year run. But there are signs that the run is over for now. It is time to think about recession and even price deflation. As I have said for months, the FED is deflating. We should expect prices to follow.

Silver and platinum also fell on March 18. They are moving together in lock-step, up and down, yet the economic fundamentals for the three are completely different. So, something is driving them that cuts across individual markets. But what? I think it is the last of Greenspan’s bubbles: the commodity bubble. I think the bubble is about to end.

But what about oil? Yes, even oil. But the rate of declining price will be less than with other industrial commodities. I think this will also be true of gold.

I believe in the Austrian School’s theory of money, including the business cycle. I have written a short book on this. I am not so committed to a position proclaiming the ever-rising price of gold that I am willing to abandon Mises’ theory of the boom-bust cycle in order to hold such a position.

Gold is ideal for Mises’ inflationary crack-up boom, although not as good as a home with a garden in the country and a few thousand gallons of diesel. This is not the crack-up boom. There has to be monetary inflation for a crack-up boom to occur. Today, there isn’t any.

If you wonder how I came to this conclusion, read my mini-book, Mises on Money.

I was convinced on March 18 that the recession caused by the Federal Reserve’s relatively tight money policy would lead to a fall in the price of all commodities, especially the precious metals. I believed that the commodity market was the last of the bubble markets. The real estate market popped in 2006, and had continued downward. I was convinced that the last market of Greenspan’s bubble economy was the commodities market.

Investors go from market to market, trying to find the next market that is going to boom. This chase proves to be futile. They chase bubble markets; they get killed by bubble markets. I was convinced that commodities were going to fall, and that this was the end of the road for the bubble markets.

In July, the commodities market did begin to fall. I think this publicly marked the end of the commodity bubble. One thing could bring it back: war with Iran. That would be disastrous internationally, and it will push the price of oil and the precious metals much higher. It was the threat of war with Iran that kept gold above $900 — not monetary policy, not the fundamentals of the market, not technical indicators, and not any of the other meaningless statistical indicators that are used by defenders of a bubble market to persuade investors that the market is anything except a bubble market.

You will no doubt see lots of reports on this or that indicator that shows that the correction in gold and silver and platinum and palladium and copper and zinc and all the other metals is temporary. I don’t think it is temporary.

I still worry about war in Iran. I don’t think people should ever discount too heavily the idiocy of governments regarding war. The absolute stupidity of the President of Georgia in launching a military invasion of the Russian-dominated province of South Ossetia last Friday is indicative of what rulers do without counting the cost of their actions. This is normal. So, while the fall in prices of oil and the precious metals has given me some confidence that neither United States nor the State of Israel will launch a pre-emptory strike against Iran in the near future, I am certainly not willing to bet all of my money, including gold, on this assumption.

Nevertheless, I have been public in my warning since the middle of March that I believed that the bull market in gold and silver has ended. If we are talking economic fundamentals, gold and silver have had their big run. From now on and for months ahead, the pressure will be downward.


Why is this the case? Because the recession is real. If the rest of the world moves into recession, as I think is likely, the demand for commodities will fall. The value of commodities has nothing to do with value in themselves. They are valuable only because the consumer goods that commodities are used to produce are expected to rise in price. Manufacturers believe that there will be increasing future demand by consumers for these goods. Therefore, they enter the market for raw commodities, land, and labor, and they bid against each other in an attempt to secure ownership of these producer goods.

Some people speak of the intrinsic value of gold. Whenever you hear anyone say this, you can know for sure that you are dealing with someone who knows nothing about economic theory. There is no such thing as intrinsic value. There is only imputed value. There can be historic value, but this historic value is based on long periods of time in which people have imputed value to a particular good or service. There is no intrinsic value, meaning a fixed market price, for any commodity. Commodities are valuable only in so far as the output of commodities is valuable. This was a fundamental insight of the founder of Austrian School economics, Carl Menger.

In a recession, consumer demand falls. The goods and services that had been demanded before are perceived as too expensive by consumers now facing a recession. They reallocate their money to the most important uses in their household budgets. They buy the most important goods and services, and they skip the purchase of marginal goods and services. So, the tools of production that are used to produce the marginal goods suffer a price decline. Demand for these producer goods falls.

Manufacturers look to the future, and they conclude that consumers will be buying far fewer of the items produced by the particular producer goods. Producers also look at the price of commodities that are used to produce these goods, and they decide to purchase fewer of these commodities. So, the price of commodities falls.

Gold and silver have been sold as hedges against price inflation, and sellers also have told customers that the Federal Reserve is dramatically increasing the money supply. For almost two years, I have said that the Federal Reserve is not dramatically increasing the money supply. It is barely increasing the money supply at all. This is why I predicted there would be a recession. This is why I predicted that consumer prices would not rise at anything like the increase in the supply of M3 and MZM.

I looked at the adjusted monetary base, and I concluded that the Federal Reserve was only increasing the monetary base by about 2% per annum. I looked at M1, and I concluded that the money supply was barely climbing at all. This led me to predict that consumer prices would slow down, and that commodity prices would fall as a result of a shift in consumer spending.

I post links to these statistics on my site’s page, Federal Reserve Charts. This is why, on March 18, I decided that the bull run in gold and silver had ended. Only war with Iran was likely to push gold back above $1,000 per ounce in 2008. I am not optimistic that gold would go above $1000 in 2009, because I expect the real estate market will continue its downward fall, and I think that will continue at least in the 2010, and it may continue into 2011. Therefore, I think this recession will be much longer than the average recession after World War II of 11 months. Gold does not do well in most recessions. Furthermore, neither does silver.

I realize that you have read a lot of reports from a lot of people that gold and silver were inevitably heading higher. Well, they are not inevitably heading higher.


If you read that there is a conspiracy to force down the price of gold and silver, then you had better also be provided with a clear explanation for why this conspiracy has forced down the price of commodities across the board. It is not just gold and silver that have fallen in price.

It is the entire Commodity Research Bureau index. The CRB index is the standard index of commodities, and it has been falling since the beginning of July. If conspirators are doing this, they surely are very powerful and very rich conspirators. Writing in The Daily Reckoning on August 8, Dan Denning reproduced the CRB chart for the year. It is clear from this chart that the collapse is across the boards.

This is no conspiracy. This is Austrian School economic theory in action.

I think we are entering a recession that will be known as the worst postwar recession since 1981. If China’s central bank slows down its 20% per annum increase in M1, as I expect that it will after the Olympics, then we can expect this recession to be international. If that is the case, then this recession could last longer, and actually be worse, in the 1980—81 recession. It may not be worse in the United States, but it will be worse worldwide. The United States has gotten rid of a great deal of manufacturing employment since 1981. We are more of a service-based economy. This means that we are less threatened by decreases in consumer demand. Consumer demand usually focuses on decreased purchases of goods rather than services. This is why recessions have such a negative effect on commodity prices.

I think we are in only the preliminary stages of a housing recession. Because we have not had falling housing prices nationally since the Great Depression, it is legitimate to call this a housing depression. This is not happening only in the United States. It is taking place all over the world. It is especially taking place in English-speaking nations. So, the supposed engine of economic growth, internationally and nationally, the housing market, has gone off the tracks. It is not going to go back on the tracks in 2009. I will regard it as nearly miraculous if it goes back on the tracks in 2010. So, we had better be getting ready for a major recession that lasts for over a year, and could conceivably last for two years.

This is why I do not expect any additional bubble markets over the next two years. We have seen that the real estate market was a bubble market. It is in steady fall, and there is no indication that it is about to reverse.

When a bubble market pops, he does not recover soon. Think of the NASDAQ stock index. It peaked in March of 2000 at 5040. It is now around 2400. That was a classic bubble market, and has never recovered. Those who thought it would recover find themselves down over 50% in terms of their equity, and down over 20% more in terms of purchasing power of the dollar. Nevertheless, they hung on. They thought the market would recover. They were wrong.


The Federal Reserve System can and will eventually inflate. I monitor the adjusted monetary base. I post it on my website. It has moved up sharply in the last month. This does not mean that this is guaranteed to be a new trend, but it does indicate that the Federal Reserve System has inflated more rapidly than it has in over five years. So, I do expect long-term price inflation. But I do not expect this to take place over the next year or two. I think price inflation will slow. It is conceivable that we could get price deflation for a few months, depending on the severity of the recession.

The housing market is sufficient, in and of itself, to keep the American economy in a recession mode for the next year. I expect to be a buyer of houses sometime over the next three years. But this recession should not be underestimated with respect to commodity prices. You should not expect the commodity bubble to reappear in the next 12 months, unless there is war with Iran.

Given what happened on Friday, August 8, do not discount the possibility of war with Iran. Governments do stupid things. On Sunday evening, August 10, “60 Minutes” ran its earlier show on the possibility that the Israeli Air Force is prepared to attack Iran. The first broadcast was scary enough. The second was even more scary.

August 13, 2008

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2008