Gold Has Its Worst Day Since Early '80s

Gold Price Correction - IllustrationOver the past couple of trading days, the price of an ounce of gold has dropped by about $200 USD.

As of this moment, gold is currently trading at around $1,360 per ounce. Late last week, an ounce of gold would have set you back $1,550.

Things got particularly ugly on Monday, as gold was hit by a "perfect storm". Gold, which is usually regarded as being a "safe haven" in times of turmoil, was obliterated as investors rushed for the exits. At one point on Monday, the price of an ounce of gold dropped by about $30 in just a couple of minutes.

So what happened? Why is the bottom falling out of gold (and other commodities)?

There are a number of reasons why gold has tanked over the past couple of days:

1) Cyprus will likely be forced to dump 10+ tons of their gold reserves in order to help finance their bailout. Will other EU countries be forced to do the same thing in order to secure any future bailouts? This development is weighing heavily on gold. In addition, the more that the price of gold falls, the more that Cyprus will have to sell.

2) Worries over China. China reported slower than expected growth for Q1, and this helped to cast a pall over the markets.

3) Fiscal stimulus in the United States. The Federal Reserve seems intent on wrapping up their bond-buying binge this year. All of the fiscal stimulus that the United States has injected into their economy over the past couple of years has been tremendously beneficial to the price of gold. Gold is a hedge to inflation, and with the US government creating trillions of dollars out of thin air to buy bonds, gold and other inflationary hedges have done extremely well.

4) Stops. Many investors (big and small) have simply stopped out of their commodity positions and are waiting on the sidelines to see what happens. Can you blame them? It's pretty tough to wade into this market right now with any sort of conviction.

5) Public opinion on gold has turned. Over the past weeks and months, financial magazines and online publications have been inundated with articles detailing the risks of holding gold and that the "Golden Era" may be over. The investing herd, which was unabashedly bullish on gold for a number of years, seems to have turned their backs on the precious metal.

6) Strong equities market. Many investors have chosen to lighten up on their gold positions in order to participate in an equities market that continues to move higher.


The $64,000 question now is - how long will gold go?

Filed under: General Knowledge

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