Gold Prices Take Huge One-Day Plunge

Gold prices drop
Gold prices plunged Monday to the lowest in 30 years.

On Monday, the price of gold had its biggest one-day drop in 30 years.

The price of gold fell more than $140 an ounce, which is the largest  one-day decline since the 1980s. Gold is now selling at $1,361 an ounce, a 9 percent decline.

Fluctuations in the price of gold is a good and bad thing, depending on the perspective.

Local spots that buy and sell gold said people who are selling could get less money for their gold. But those looking to buy could get a better price.

“When there is dramatic change in gold, people come in and buy, people come in and sell.  People will ask me many times ‘what should I do? Should I hang on to it? Should I sell it?’  Some people are hanging on to it because they think the market is going to go up, other people think it’s going to go down so they are selling their gold right away to get the best price they can for it, which we pay,” said Georgio Theofilos of Instant Cash for Gold & Diamonds in Austintown.

Gold was at an all-time high in August of 2011, selling at more than $1,900 per ounce. It has been gradually falling since then.

Before the drop, gold had climbed every year since 2001, as investors bought the metal both as protection against inflation and as a so-called safe haven. The precious metal peaked as lawmakers wrangled over raising the debt ceiling in the summer of 2011 and threatened to push the U.S. into default.

But a slowdown in inflation, combined with speculation the Federal Reserve is considering winding down its stimulus program, prompted investors to sell Friday. Reports that Cyprus may sell some of its gold reserves to pay off its debts, following its bailout, also rattled the market. The selling then intensified Monday as speculators dumped their holdings.

Here’s why gold is falling and what the decline says about the economy:

INFLATION REMAINS LOW

Investors bought gold because they were afraid that inflation would rise too fast as a result of the Fed’s effort to stimulate growth by driving down interest rates through purchases of government bonds. The higher cost of goods would erode the purchasing power of dollars. So far, though, inflation has remained under control, even as the economy has improved. In fact, the value of the dollar has risen recently relative to other major currencies. That makes gold a less attractive investment.

FEAR FACTOR EASES

Investors also buy gold as a safe haven, a kind of insurance when they are worried about the possibility of some kind of a financial collapse. While there has been a lot to worry about over the last six years – the financial crisis, the threat of a U.S. default, meltdown in Europe – none of those events have led to financial Armageddon.

That fear factor has dissipated after central bankers around the world have bailed out one economy after the other.

“Gold is an insurance asset for when things go very wrong,” says Nicholas Brooks, head of research and investment strategy at ETF Securities. “It’s just that people don’t feel the need for insurance right now.”

STOCKS ARE RISING

Even with Monday’s stock market drop, stocks have surged this year. Investors are optimistic that the U.S. economy is poised to decisively pull out of its slump following the Great Recession. That’s pushed the Dow Jones industrial average and the Standard & Poor’s 500 index to record levels.

The Dow is up 11 percent this year. Before the big sell-off, gold was down almost 7 percent.

“In this world of hot money, ‘what have you done for me lately,’ people have lost patience. Especially when the Dow started making new highs, they started thinking, ‘Why am I in gold? I’m missing all the action,’” says Peter Schiff, CEO of Euro Pacific Capital.

INTEREST RATES COULD RISE

The Fed has started contemplating ratcheting back its economic stimulus. If the economy continues to improve, the Fed may even raise interest rates to keep the economy from overheating, pushing up the cost of goods too much.

Holding gold makes sense when interest rates are close to zero, as they are now. That’s because your money isn’t earning anything in your bank account. If your money is earning a return on deposit, the attraction of gold fades.

The Associated Press contributed to this report.

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