Talk about losing its luster.
After more than doubling – from $881 an ounce at the end of 2008 to a record of over $1,921 in September 2011 – gold dropped to a 34-month low last week.
It’s now down approximately 25% since the beginning of April, putting it on track for its biggest quarterly loss since at least 1968.
So much for being a store of value.
What gives? The Fed, of course.
“The selloff is a continuation of the response to concerns over the Fed tapering stimulus,” says Bart Melek of TD Securities.
[ad#Google Adsense 336×280-IA]Surely, the swift and severe plunge represents a buying opportunity, right?
I mean, it’s not like the Fed finally stopped printing money.
Wrong!
As the old saying goes, we should never try to catch a falling knife.
And that’s especially true in this case.
There are actually three fundamental forces working against gold prices. Combined, they could ultimately push the precious metal down another 25% from here.
~Bearish Sign #1: Capitulation, Not Conviction
In some circles, selling gold would be considered sacrilegious. If you fall into that category, go ahead and stop reading right now. There’s no chance of talking any sense into you.
For all the rational investors out there, though, consider the facts:
So far in 2013, exchanged-traded funds have sold more than 500 tons of gold. That’s equivalent to about 20% of their total holdings, according to David Wilson, Director of Metals Research and Strategy at Citigroup (C) in London.
Assets in the most popular, bullion-backed fund – the SPDR Gold Trust (GLD) – fell to the lowest level since February 2009. In dollar terms, we’re talking about a net $17.5-billion withdrawal.
Clearly, a stampede for the exits is underway. And it’s not just skittish retail investors hightailing it out of gold. Hedge funds want out, too.
According to research firm, Eurekahedge Pte Ltd., the number of hedge funds investing in gold recently dropped to the lowest level since 2010.
As Tom Kendall, Precious Metals Analyst at Credit Suisse, puts it, “The word at the moment is capitulation.” I’ll say!
Kendall notes that long-term investors, “who you would have expected to hold on through thick and thin,” are selling.
I’m sorry, but sudden rebounds don’t materialize under such conditions.
~Bearish Sign #2: Where Have All the Institutional Cheerleaders Gone?
As you know, many investors abhor independent thinking. Instead, they rely on the “rah rahs” (aka cheerleading) emanating from major Wall Street banks.
However, the banks aren’t wielding their influence to stem the gold selloff.
On the contrary, firms like Morgan Stanley (MS) and Goldman Sachs (GS) are lowering their price targets for gold.
Heck, even UBS (UBS), historically one of the most bullish banks on gold, is souring on the precious metal.
Over the last year, the Swiss bank lowered its price target from $1,750 to $1,050 an ounce. It’s now advising high-net-worth clients to avoid gold, according to reports in the Financial Times.
The analysts over at ABN Amro Group are even more pessimistic. They predict that gold will drop to $900 by the end of next year. That’s equal to a 25% dip from current prices.
~Bearish Sign #3: No Chinese or Indian Saviors
The last time that gold sold off (back in April), Chinese and Indian buyers swooped in to purchase coins and jewelry, which prompted a rebound in prices. Apparently, they’re not interested in saving the day again, though.
“Asian demand hasn’t emerged this time,” says HSBC analyst, James Steel.
So we’re talking about a global absence of buyers.
Bottom line: “We’ll need to see evidence of more physical buying and demand from central banks before [gold] really turns around,” says Melek.
Translation: Gold prices haven’t hit bottom yet. So look out below!
And be thankful you’re not billionaire hedge fund manager, John Paulson, right now. At the start of the year, he reportedly had 85% of his personal capital in his firm invested in gold. Ouch!
Ahead of the tape,
Louis Basenese
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Source: Wall Street Daily