Gold Plunges

Five months ago gold broke the $1,000 mark. Last week gold bullion declined more than it has in 25 years, plunging as low as $777. Oil and silver also declined sharply on Friday, driven by a 5 1/2 month high in the U.S. dollar against the Euro and what many believe is a coming global recession. As globeinvestor.com reports:

Gold is down nearly 5 per cent so far this year, on track for its first annual decline in seven years. New York Mercantile Exchange gold futures dropped 8.4 per cent for the week, the biggest retreat since 1983.

"The debacle was so swift that conventional terms like 'oversold' no longer apply," said precious metals analyst John Nadler at bullion dealer Kitco in Montreal. He said the rout will not likely end until the metal's price drops to "between $680 and $730."

What has happened is that speculative institutional funds that had flooded into gold, and particularly into exchange-traded funds for the metal, have decided to take the money and run, Mr. Nadler said.

That's because developments such as the U.S. credit crunch have failed to do as much damage as expected - thereby keeping gold's price moving up - thanks to intervention by the U.S. Federal Reserve Board and other central banks.

But if intervention is the key to warding off disaster, the economic history of the world would be much different. Interventions take time to play out. They often achieve what appear to be stunning results short-term, such as an investment boom triggered by cheap credit, but we can count on them to fail. And even though the prices of gold, oil, and silver fell sharply last week, they're still high compared to what they were a year ago or earlier this year.