Gold collapse triggers new questions about the metal

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Gold plunged over 10% yesterday and is down over 20% from its highs.  Many investors are shocked by this move, which started in Asia and then was further exacerbated by large block orders.  But what does this mean for average investors?

Gold per ounce has been around $1,500 for a long time; it’s always been considered to be a rich mans investment.   Silver is even sometimes called poor man’s Gold.  Silver also sold off with many other commodities as well.

Why do large investment banks and central banks have natural animosity of Gold?

For one reason, they can’t create it out of nothing like they can do with currencies or derivatives.  Modern finance is virtual to a large extent, and commodities, Gold being the best example, can’t be created electronically.  Gold can be mined, or purchased.

Second, since Gold is a physical commodity there are a limited number of ways managers can charge fees from buying the metal.  In other words, you don’t need a money manager to buy some Gold and sit on it for your portfolio.

Finally, Gold is an indication of a devaluation of currencies such as the US Dollar, so a high Gold price indicates the value of the US Dollar is going down.

Gold was used for central bank accounting; while daily payments were made internally on the books, a large dis-balance would be settled by a physical Gold transfer.  This is not so common in today’s world, although Germany has initiated a plan to bring its Gold back to Germany.

So there are a few reasons why Wall Street and the world’s central banks don’t like investors buying Gold.

What does this mean for smaller investors?

For anyone looking to add Gold to their portfolio, now is a good time to buy.  It may continue lower still; but many are still bullish that Gold will continue higher after this reversal.  So for those looking for a long term investment in Gold, the recent sell off has produced a great buying opportunity.

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