Lomas: A seven trillion dollar gold price readjustment

After two years of steadily increasing gold and silver prices, the market got a harsh reality check in two days at the end of January, when the gold price fell by $670 an ounce. Silver dropped $38 an ounce around the same time.

Gold prices often drop as the economy improves, and news reports initially attributed the drop to a surge in business confidence after the president chose a moderate to head the Fed, the USA's central bank. Other analysts expressed a variety of opinions for the sudden price drop, such as some speculators taking cues from a Chinese billionaire and other speculators collectively fearing a drop in the gold price.

More gold is traded in a week in the futures market than produced in a year in all the world's mines. In the short term, prices are influenced more by speculators than by individuals who stash wealth in physical gold.

The sudden drop in gold and silver prices in January wiped out $7 trillion in paper wealth in two days. That is equivalent to the combined national debts of the UK and France, or in commercial terms, seven times the value of Walmart, with its 50,000 stores.

No one fully understands why this drop in gold and silver prices went viral, since it may have been due to a confluence of causes. Gold regained most of its losses in two weeks, but this episode shook investor faith in steadily increasing precious metal price increases, and it's unclear where prices will go from here.

However, it is clear that investors, mine operations, and mining corporations need to brace for future price fluctuations.

Conditions for the fall

Huge sudden metal price changes may be triggered by short-term events. Price changes may be driven by speculation, market manipulation, or reaction to news that compels investors to shift from metals to stocks or bonds.

The lines dividing investors from speculators and speculators from gamblers have blurred in recent years, and there are more wealthy individual investors than ever before. Stock price increases over the past few years have gotten to the point that one fifth of U.S. households now have over $1 million dollars in "investible assets," not including their houses. Households with a combined income of $300,000 are on that million-dollar path, provided that they save and invest regularly and refrain from spending on extravagances.

Those new millionaires, combined with their ease in shifting investments in and out of gold, has led to potentially higher market instability.

Other gold investors include options traders, who buy a contract to sell gold in the future at a set price. Traders betting on higher prices will rush to sell their options when prices fall. Excessive speculation creates a volatile market in gold and in other popular investments, such as Bitcoin, which dropped by a third in value in early 2026.

In addition, higher gold prices through the year have been driven by political instability in the Middle East, Latin America, and Europe, as people fearing economic turmoil seek a refuge from high inflation or a devaluing currency.

Quantitative Easing increased the money supply

During the Great Recession of 2008-2009, the Fed came up with Quantitative Easing (QE), a way to expand the money supply without printing money. Prior to that, the Fed primarily stimulated the economy by lowering the interest rate, but had to shift to QE after interest rates got so low that further cuts were ineffective.

It's difficult to briefly explain QE, but the Fed increased the money supply through placing digital money in banks instead of sending cash to consumers. Banks ended up flush with new money, and this kept interest rates low, which enabled companies to expand. This favorable business climate caused a rise in stock prices that prompted investors to shift from bonds to stock.

Some of this additional money has turned up as inflation in the form of sharply higher prices in housing, automobiles, and luxury items, though price increases in food and fuel have been more moderate.

QE was intended to be temporary, but it was prolonged for political reasons, despite its risk of triggering more widespread inflation. QE was further extended to avoid an economic crash following covid. In a separate act, the federal government sent free money in stimulus checks to Americans to keep businesses afloat and avoid a depression, though this additional money led to more consumer price inflation than ten years of QE.

Some central bankers now want to reduce the money supply by Quantitative Tightening (QT), a reverse of QE that will reduce inflation and increase interest rates. However, politicians are divided on whether to push for low inflation or low unemployment, and they can't do both at once because higher interest rates may increase unemployment.

What this all means to investors

An alternate theory is that we are entering a new era where the past is no longer the key to the present, and boundless wealth with little inflation awaits those who stick to the course that made millions of investors wealthy.

It's hard to argue with the newly wealthy against their evidence of success, especially when few of today's investors are old enough to have lost money in the financial shock of the Great Recession of 2007-2008, the housing crash of 2006, the dot com crash in 2000, or the gold and silver crashes in 1980. Some believe that this time it will be different, and it's hard for them to sell during a rising market, especially when stocks have soared since covid stalled businesses in 2020.

Gold and silver prices generally run the opposite of economic outlooks, and though a high gold price is good for communities with nearby gold mines, an overly high gold price is often related to economic decline. This happened in 1980, when gold reached a peak of $800/oz. only to fall to $300/oz in 1982 and mostly stay below $500/oz through the 1980s. The economy in 1979 was a period of stagnation and double-digit inflation, followed by mortgage rates that peaked at 19% in 1981, and persisted above 10% until 1990.

Individuals who accumulate gold do not decide in unison when gold is overpriced and sell their gold and invest in something else. Many small holders buy gold for tangible wealth that can be readily sold and do not have access to alternative investments. Their gold is typically sold during hard times or for special expenses.

The story is different for wealthy people who benefited downstream from the QE bubble of cash. When they sell stock, their wealth is generally reinvested, as investors ride the wave to expand their wealth.

At the same time, many typical workers in wealthy countries are not affluent enough to invest in markets and have little excess cash after paying their monthly bills.

Thus, market prices are not always in unison with consumer sentiment, because those who buy gold on the retail market are not as concentrated on gold's immediate price fluctuations as are speculators and large investors.

What all this means to mining companies and their operations

Considering the possibility of a slump or a decline in metals prices, the mining companies need to plan on how to deal with an unstable market.

Steadily rising metals prices are typically good news for mining companies, but speculative bubbles that burst can destroy expansion programs when prices drop, leaving companies with debt from half-done projects that are no longer economically viable. Expansions take years, while prices may drop suddenly within months, and a gold producer's revenue is based on the global gold price.

At the mine level, operations need to focus on expansion while covering their costs. This means replacing equipment and renovating processing plants as needed.

Operations also have to decide whether they should pursue maximizing ounces to pay off corporate debt, or if they should extend mine life by mining lower grade reserves that would be unprofitable if the gold price drops. The mine may have to rely on corporate guidance rather than local intentions, because quarterly profits may be more important to the corporation than extending a specific mine life.

What this means to communities in mining regions

Elko, Nevada, has experienced slumps in gold mining, but fewer residents know what it was like, since those who lost their jobs or businesses tended to leave the area. Many people in the mining industry experience mine shutdowns during their careers through falling metals prices or exhausted deposits, and they generally move on to other mines.

Communities dependent on mining may suffer catastrophic economic damage when the main employer in a company town ceases operations, whether the main employer is a factory or a mine or any other industry that provides a base of lucrative jobs. An imminent shutdown has an effect on local business investments.

In Elko's case, several years of sustained gold prices have resulted in new retail businesses and housing developments, but erratic gold price drops may discourage future investments and community improvements. The recent drop in prices may just be a reality check that may not affect the current business momentum, but more gold price drops may inhibit development for a few years.

The sudden $7 trillion drop in gold and silver value was significant, but it was not necessarily an indicator that gold and silver prices will continue to drop, or even stagnate in the future. However, we don't know where the price will go, and this one episode may have ramifications, since it could happen again.

Gold is global and whatever happens to the price is insignificant compared to what may happen to some communities, the gold companies, and their individual operations. Everyone who may be affected must be reminded that good times eventually end, but that they do not need to always act as if the end is imminent.