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The Gold Plunge: Is It Time To Jump In?

18 April 2013 in Trading Ideas

There are few fence-sitters when it comes to a controversial asset class like gold. So when the bottom dropped out on the yellow metal’s price this week – plummeting below $1,400 an ounce for the first time in more than two years – investor/pundits flooded all forms of media to reaffirm why they were right about an upcoming gold crash – or why they’ll be buying it on what they now consider the cheap.

Of course, this week merely witnessed an acceleration of what’s been a pretty tough few months for gold. Since hitting $1,800 an ounce last October, gold is now down 24%. During that same time, investors have pushed the S&P 500 about 9%.

Precious Metals MotifThe Precious Metals motif, which is 83.5%-weighted with stocks of gold miner companies, is down 37.9% so far in 2013, and has lost 38.4% in the past 12 months.

Leaving aside broader investment philosophies for the moment, Quartz.com’s Matt Phillips pointed to several possible contributors to this week’s falloff in gold, including expectations that Cyprus would add to the world’s gold supply by selling some of its reserves to fund its bailout, sluggish Chinese growth figures taking the gas off global inflationary pressures, and bearish media coverage of gold over the weekend.1

Oh, and there was also a bearish note last week from investment bank Goldman Sachs, presciently saying the selloff in gold could accelerate soon because so many big investors have been betting on a big jump for a long time.

As a Warren Buffett letter reminded us again this week, that’s the thing about gold – sentiment is everything.2 “This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.”

These days, there isn’t much in the way of avid desire. Unless, of course, you’re investor Marc Faber, who told Bloomberg he didn’t think the bull market in gold was over, and additionally noted that the S&P 500 is now just 2% above its March 2000 high. In that same timeframe, gold is up 442%.3

If investors in gold can hold onto that sentiment, prices may begin to level out.

1Matt Phillips, “Five reasons for gold’s sudden, violent collapse,” Quartz.com, April 15, 2013, http://qz.com/74432/gold-collapse-why-now/#74432/gold-collapse-why-now/, (accessed April 16, 2013).

2Ivanhoff Capital, “Warren Buffet On Gold,” April 15, 2013, http://ivanhoff.com/2013/04/15/warren-buffett-on-gold/, (accessed April 16, 2013).

3“Marc Faber ‘Loves’ Gold Price Decline, Sees Buying Opportunity,” Valuewalk.com, April 12, 2013, http://www.valuewalk.com/2013/04/marc-faber-wants-to-buy-gold-after-price-decline/, (accessed April 16, 2013).

Tags: gold