Gold Meltdown Heats Up: 5 Reasons For The Stampede

A pen and a pair of glasses on top of a graph Credit: Shutterstock photo

Gold ETF investors stampeded for the exits Wednesday as spot gold prices breached $1,400 an ounce while a flurry of economic news banished the rationale for owning the yellow metal as a safe haven.

The U.S. dollar, which typically trades opposite the metal, raced to a 10-month high against foreign currencies. The euro -- which makes up more than half the index -- weakened as the eurozone recession extended into the sixth quarter and better-than-expected homebuilding numbers lifted optimism in the U.S. economy.

That's while weak manufacturing data dampened fears of inflation.

Spot gold prices slumped 2.08% to $1,397 an ounce.

SPDR Gold Shares ( GLD ), tracking about a 10th of an ounce of bullion, slipped 2.31% to 134.63 -- a one-month low -- in heavy volume.

Market Vectors Gold Miners ETF ( GDX ) slid 4.56% to 27.40.

Market watchers said pre-placed sell orders, known as stop losses, were triggered when gold broke $1,400 an ounce, giving way to more selling.

PowerShares DB U.S.Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, climbed 0.27% to 22.79 as the euro weakened following the European Union statistics office reporting the 17-country bloc is now in its longest recession ever. First-quarter gross domestic product contracted 0.2% over the prior quarter, with France joining the list of nine EU countries in recession.

In the U.S., the National Association of Homebuilders/Wells Fargo housing market index registered 44 in May, eclipsing consensus expectations of 43. It rose from April's reading of 41 and significantly progressed from 28 a year ago and 16 two years ago.

Industrial production fell 0.5% month to month in April, which was worse than the 0.2% decline forecast and the 0.3% uptick seen in March. The data lifted expectations for deflation, an enemy for gold.

The gold cheering squad contends trading in the futures market is artificially depressing prices, while epic demand for physical gold is letting sellers unload coins and bars at a premium above market values.

"Major banks are selling excessively more bullion on paper than they have to deliver," Terry Sacka, chief strategist at bullion dealer Cornerstone Asset Metals, said in an email. "If just 10% of the contracts in the futures market stood for delivery, the exchange would default."

Premiums over spot prices for American Eagle coins are averaging 22% at his shop, he said.

Smart Money Bullish?

The CFTC's Commitments of Traders data show commercial traders -- the so-called smart money -- hold historically low short positions in both gold and silver, suggesting they are heavily bullish. The speculators -- the so-called dumb money who are usually wrong -- are even more bearish than they were at gold's 2008 low.

"Really low readings like this are associated with important bottoms for gold prices," Tom McClellan, editor of "The McClellan Market Report," said in an email.

Precious metal ETFs have bled assets on all but one day in the past month, TrimTabs data show. Investors pulled out $519 million, or 0.7% of total assets, in the past week and $5.2 billion, 8% of assets, in the past month.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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