Central Banks Continue to Distort Financial Markets, Gold Prices Headed Higher

After hitting three-week highs, gold prices slipped slightly on Friday as U.S. stocks suffered the worst slide since the U.K.’s surprise decision to exit from the European Union, as hawkish comments from Federal Reserve officials slammed bond and equity markets.

Last Friday, the Dow Jones Industrial Average (DJIA) closed down 395 points, or by 2.1%, while the S&P 500 index plunged 53.49 points, or 2.5%, to close at its intraday low of 2,127.81 with all 10 main sectors finishing lower. European stocks and bonds fell in a volatile market on Monday, as investor confidence about global central banks’ monetary policies may be waning.

Major European stock indexes fell as much as 2 percent, after Asian shares suffered their sharpest setback since June.

Hong Kong’s benchmark stock index fell more than 3 percent, its biggest one-day drop in seven months.

On Monday, the DJIA rebounded by more than 239 points as expectations of a September interest rate hike faded after Fed governor Lael Brainard’s comments suggested that Fed is not ready to hike in the FOMC meeting next week.

As I have mentioned countless times before, no matter what the Fed decides to do, we cannot ignore the fact that we’re in the early stages of what I believe will be one of the largest gold and silver bull markets in history.

Central banks around the world are intentionally devaluing their currencies. And, instead of stimulating economic growth, they’ve created the biggest transfer of wealth in modern times while artificially propping up global stock and bond markets with zero and negative interest rates.

These flawed policies were a major contributor to gold’s best quarterly performance in 30 years earlier this year. And, gold’s rise this year through the end of May wasn’t because of a gold bubble. It’s the world realising central bankers have distorted financial markets, putting our financial world on the brink of insolvency.

Governments throughout history have always destroyed the currencies they created. It is why people eventually hold physical gold as their preferred form of money.

Gold is a form of insurance. Buy it to protect your portfolio… hoping to never have to

use it. It is especially prudent to buy gold as insurance today. Holding just a small amount of gold can save your portfolio from catastrophic losses. Investors around the world use it as a store of wealth, and many believe it’s superior to any and all paper currencies.

Yet despite its popularity, the gold price is currently languishing well below its 2011 peak of nearly $1,900 per ounce. But, there is enough evidence to show that prices have been suppressed and manipulated by the bullion banks.

While many analysts initially expected the lower gold price to lead to mine closures as yet most gold producers have opted to cut costs rather than shut down their operations entirely. However, there has been a substantial reduction on exploration as many gold miners focus all their money on their existing operations rather than searching for gold elsewhere. While that’s not a problem just yet, many market watchers believe that ultimately gold may be in short supply.

Like most other commodities, supply and demand are key factors in the gold market. But, they’re not the only things that can have an impact.

Global economics as well as geopolitical instability can have a drastic effect on the gold price. Central bank monetary policy and currency devaluation can also have a large impact on prices. And, apart from economics, price manipulation is also a key concern in the gold space.

Over the years, there has been a drastic change in the supply dynamics of gold. Whereas in the past, South Africa was well known for being the largest gold producer by far, the country has now slipped into seventh place. And, as governments’ policies towards mining cause the larger mining houses to look elsewhere for their growth, there has been a huge increase in illegal mining in the country. This is very common throughout Africa as politicians attempt to destroy the mining sector and use their power to self-enrich themselves through corrupt dealings and senseless regulations. And, constant unreasonable demands from trade unions will ultimately ruin the sector completely. Thus supply from African countries will become less unreliable.

Meanwhile, China has emerged as the world’s top gold producer for the eighth year in a row. And, in addition to being the largest gold producer by a significant margin, China is also the world’s biggest consumer of gold.

Australia is currently the second largest producer, followed by Russia, the United States, Canada, Peru, South Africa, Uzbekistan, Mexico and Ghana.

As a side note on supply and demand, investors should be aware that most of the gold ever mined still exists and is accessible — for example, as jewellery or bullion. In contrast, many other metals come off the market when they are used. That means that gold is also affected by saving and disposal tactics, and not just by simple supply and demand.

While the gold price may be lower than investors would like, it’s clear that interest in the metal remains strong around the world. Gold will likely trade sideways until the September Federal Reserve meeting is out of the way. Meanwhile, expectations for a rate hike in September, has decreased due to recent comments from several U.S. Federal Reserve officials.

In the current environment, market participants have become so focused on the words of central bankers that nothing else really matters.  Economic data, global politics, supply and demand, company fundamentals and technical chart patterns mean less and less as Fed-speak means more and more. The obsession over what the Fed may or may not do has persisted for several years now. A rate hike of 25 basis points is unlikely to impact on gold prices and as I have pointed out there are other factors at play that will influence gold prices.

While most analysts concentrate on a plethora of useless economic data to determine where gold prices are likely to go, I will stick with my prognosis that we are heading towards a major financial meltdown and prices of both gold and silver are headed much higher.

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