In a speech to the House of Commons at the Palace of Westminister in London on November 12, 1936, amidst the uncertainties, Churchill had once quoted, “The era of procrastination, of half measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences.” Dark clouds are hovering once again over the Euro zone in respect to the euro zone sovereign defaults and an interlinking banking crisis. Last week witnessed more than $3.4trillion erased from global equity markets, sending a prominent world index of shares into bearish territory, on concern that governments are running out of tools to avert another round of recession.

A question arising in investors mind at the moment is- Why has gold dropped since reaching a record $1923.70 an ounce on September 6^th 2011? Why has silver plunged the most since October 1979? Gold and silver are currently trading at 1602.17 and 27.60 an ounce respectively; a major fall since the heights attained in the last few months-baffling questions which require immediate addressing. Following are the possible fundamental causes for the decline in the prices of gold:

·        Offsetting Losses from Equities

Evidences are clear that investors are selling gold to pay for massive losses in other asset classes like equities and commodities. The markets have taken a turn for the worse and the need to find ready cash and profitable accounts have compelled investors to offset their profitable gold positions. 

·        Liquidity and Margin Calls

Gold has become the major source of liquidity for global margin calls. Exchanges are making it more expensive for speculators to invest. CME Group has increased the margin requirements on gold and silver. The minimum cash deposit for gold future have risen 21 % to $11,475 per 100-ounce contract at the close of trading on September 25^th, CME has said. The minimum cash deposit for silver has been raised from $21,600 to $24,975.

·        Flight to Ready Cash

The financial markets are seeing a flight from illiquidity to liquidity, i.e. from all asset classes-including precious metals-to cash because the events of 2008 is still fresh in people’s minds. One can recall that gold prices had tumbled by 18% in 2008 as the most-severe slump since the 1930 Great Depression had spurred losses in global equity and commodity markets.

·        Too Fast Too Soon

Investors have opined that the run-up in the gold price was far too fast and too soon as speculators extended their long positions in the markets. All these investments were bound to face a big fall, at some stage, which has now arrived. It looks like gold’s plunge was attributed to the closing out of these positions by some prominent hedge funds of the big Wall Street, European and Asian banks.

The question-Is this a short-term or a long term correction? – will be answered in the coming days. Some senior executives from the gold industry feel that the long-term bullish trend in the price of gold is likely to continue because physical supply from new production is very limited. This leaves open the question that how long will the transition period of falling gold prices be before the widely-anticipated long term trend continues?