As you probably already know, gold suffered a historic
collapse this week.
As surprising as it may sound, this could actually be good
news forcommodity investors.
But I am not about to tell you to enter into the goldmarket
now that prices have fallen. I actually still think we haven't
seen the last of this gold selloff.
But there is a silver lining. I'll discuss this more in a
second. First, let's hash out why gold fell so much...
Gold had already sunk below $1,500 per ounce in a 5% rout last
Friday, but the selling really intensified at theopening bell on
Monday. The metal was in a near free-fall for much of the day,
losing more than $30 in a matter of minutes as big institutional
investors exited in droves. By the end of the day, it had
retreated another 9% to close all the way back at $1,360 per
This was the steepest two-day decline in more than 30
So what triggered this stampede? Actually, it was a perfect
storm of negativefactors that all collided with freakish
Here are the five main culprits:
A key gauge of wholesale prices registered a sharp drop on
Friday, quashing expectations thatinflation was gaining steam
(rising inflation boosts demand for hard assets like gold).
Retailsales and other economic data strengthened the U.S. dollar,
exacerbating the exodus from gold (which typically moves
inversely to the dollar).
After acting as a commodities tailwind for much of the past two
years, the Federal Reserve's quantitative easing program looks to
be winding down. Traders are reacting to the possible end ofthe
Fed 's powerful monetary stimulus.
China disappointed the market by posting an underwhelming 7.7%
growth rate in first quarterGDP .Analysts were expecting growth
to accelerate to 8%.
The cash-strapped country of Cyprus is being asked to sell $525
million worth of gold bullion to pay downdebts , and concerns are
growing that other weak European nations might also have to dump
their holdings to raisefunds or satisfybailout requirements.
That's a remarkable confluence of events. Moreover, these
developments run counter to the samebullish arguments that had
propelled gold to a peak above $1,900 per ounce.
Central banks around the world had been hoarding gold by the
ton -- now they're selling.
The Fed's loose monetary policies have been a major ally for
gold investors -- now they're tapering off.
Retail investors had been flooding gold
with billions incash inflows -- now they're making
TheSPDR Gold Trust (
) had to sell 22 metric tons just last Friday to meet
Hedge funds and other institutional investors have started to
head for the exits. There are unconfirmed reports that one
largeWall Street brokerage unloaded 4 million ounces in early
morning trading Monday, which may be what sparked the panicked
selloff. And once it started, the falling prices triggeredmargin
calls, which led to more selling as positions liquidated.
Prices stabilized somewhat Wednesday, but they're still at a
dicey point. This sudden pullback from above $1,600 to below
turn out to be a buying opportunity. But the factors that caused
the sell-off aren't going away anytime soon. And if the status
quo remains, this 12-year streak of uninterruptedgains may come
to an end in 2013.
So what does thismean ?
During the run-up, I exposed myself to gold only sparingly in
my Scarcity & RealWealth portfolio. Before selling two
goldstocks this week [New Gold (
) and NovaGold Resources (
)], gold miners represented just 3.2% of my portfolio assets.
It's not that I dislike gold. In fact, I'm still holding on to
one gold miner, Goldcorp (
), which has the strongestbalance sheet and most visible growth
trajectory of the bunch. I simply favor more useful commodities
underpinned by demand and not justspeculation . And now that the
speculators are running away, there's
littlesupport for gold prices right now.
To be sure, goldwill always be coveted as long as governments
pursue reckless policies thatdevalue papercurrency . But unless
and until inflation picks up, I will have limited
The silver lining?
Along with gold's fall, other commodity groups have been
hammered despite solid (and in many cases improving)
fundamentals. Platinum, aluminum, oil, grains and other resources
have been unfairly punished and could snap back sharply once the
And with ballooning governmentdebt and the Federal Reserve
printing more and moremoney every day, it's important for
investors to have exposure to real,tangible assets like oil and
Risks to consider:
Of course, commodities are volatile... and any number of
events can send prices down (or up). But byinvesting in solid
producers that are pulling important, yet dwindling, materials
out of the ground, investors maximize their potential to get huge
returns from these tangible assets.
Action to Take -->
Indiscriminate sell-offs like this week's create truly
exceptional buying opportunities -- so I'm keeping some cash on
the sideline while I search for the best entry point.
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