Gold Rush: Blip or Bust?

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Gold is crashing on today’s markets as investors, seemingly spooked by recent decisions in Europe, have begun to exit the stock en masse. According to Reuters, the metal is headed for its worst two day loss in 30 years, leaving many investors incredibly vulnerable. Certain Hedge Fund Managers are almost certainly hitting the panic button.

Gold Rush: Blip or Bust?

Commodity futures have been doing particularly poorly on this morning’s market with Gold leading. The yellow metal has lost about 9.5 percent of its value since last Monday’s close while crude oil has lost about 3.5 percent of its value. Silver had lost 10 percent of its value at its lowest point today.

Gold has been touted by hedge fund managers like Kyle Bass and John Paulson as an excellent investment to hedge against inflation. In recent years, normal investors have been targeted by television advertisements offering gold as an investment opportunity. Today’s gold crash has clearly affected more than just big investors.

The reasons behind today’s crash are not yet fully understood, though many analysts have pointed to a Cypriot decision to sell central bank gold in order to make ends meet. Cyprus itself doesn’t have enough gold to rock the market. The worry is that other European nations with larger stocks, notably Italy and Spain, may follow suit. A second factor is speculation that QE3 may end in 2013, much earlier than previously thought.

We’ve been following the gold market for a long time at Valuewalk, and for a long time the market has appeared as if it was heading for a crash. Gold’s classic problem of not actually being used for anything has reared its head and the possibility that gold might actually be sold rather than hoarded has killed the market.

Even if today’s crash proves temporary and unrepresentative of the general market, investors could learn a lesson more valuable than the gold they treasure so much. Gold prices depend on bulk owners, in this case central banks, deciding to hoard the metal rather than sell it. If that changes the market falls apart.

The fallout from today’s gold crash will be interesting, particularly its effect on the assets of big hedge fund managers. Gold has broken its support at $1400, the new support, according to some analysts, is at $1300. The escalation of panic and the cumulative effect of today’s sell off suggests that the actual price support might be much lower if the risk factors turn into a reality.

Gold investors should monitor the situation in Europe closely, if they’re willing to continue exposure to European Central Banker’s decisions.

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