Massive drop in gold prices give a precursor to next major economic crash

(April 15, 2013 - by Kenneth Schortgen)

On April 15, gold spot prices dropped more than 7% in the first two hours of trading in the U.S., expounding upon the 5% drop in price that took place on Friday. This crash of more than $200 per ounce over the past two trading days provides a warning sign, and a precursor to a major financial crash coming to the global economy.

In July 2008, gold quickly dropped 21% - seemingly pre-empting the Lehman debacle and the collapse of the western banking system. In September 2011, gold fell 20% in a short period - as Europe’s risks exploded and stocks slumped prompting a globally co-ordinated central bank intervention the likes of which we have not seen before.

Gold and silver have always been barometers of the strength of a particular currency, and as an asset hedge to other paper investments. When major selling of gold takes place in the markets, the primary reason is the need for sovereign countries, banks, or hedge funds to liquidate holdings to cover margin calls, or use as collateral for debt obligations. We are seeing this take place as the Troika calls for Cyprus to hand over their gold reserves to collateralize a sovereign bailout, and investment banks dumping more than 400 tons of gold onto the markets over the past few days to create solvency in preparation for a potential monetary crisis.

In the aftermath of the 2008 credit crisis, gold first fell to $746 per ounce, only to climb back over $1900 as the Federal Reserve began money printing under QE1, 2, and 3. Most of that stimulus in the Western economies went to the equity and stock markets, while Asian governments concentrated on buying gold as a hedge to the dollar’s devaluation. However, China today issued a negative report on GDP and manufacturing for the last quarter, and the global economy is recognizing that all areas of the world are now in recession.

History shows that hyperinflation is always preceded by massive asset deflation, pushing central banks and sovereign government to monetize far above desired risks. Today’s sell-off of gold, silver, oil, and other assets, coupled with China’s horrific economic numbers, is a warning and a prelude to another major economic crisis coming, similar, if not worse, to what took place in 2008 in the U.S., and in 2011 in the Eurozone.