The price of gold, and the broader commodities market, plummeted on Monday morning. At one point SPDR Gold Shares ETF, was down over 8%, hitting fresh 52-week lows at $130. Miners like Barrick Gold and Freeport-McMoRan fared even worse, with Barrick's shares plunging over 12%. The sudden "flash crash," and broader gold decline in recent months, has left investors searching for answers.
The financial media has been more than happy to offer an answer, or a hundred.
They actually know the real reason, they just don't want you to. Or perhaps they just don't want to say it aloud. Before I elaborate, let's examine causes for golds decline, according to the financial media.
Pundit's reason #1: China
It was all too easy to link Mondays poor economic data out of China to gold's decline, as GDP grew at 7.7% instead of 8%. China's slowing economy isn't good news for commodities as a whole, but it has no real bearing on goal. You probably heard this headline a bunch, but it's bunk and the reasoning is coming up in pundit reason #2.
Pundit's reason #2: Gold has limited practical use
Leave it to the financial media to wildly contradict itself, multiple times, in the same day. When it comes to economic slow downs, metals like copper, steel, and aluminum suffer. Those metals are all "useful" -- they're used to build and soar in hot construction markets -- but not gold. Gold is by nature, for investment purposes, always a speculative play.
So how in the world could a China slowdown do anything but benefit gold? That kills reason #1, so what of #2?
The argument that gold has no use (aside from being desirable) has long been an argument. This is not news, nor noteworthy, this didn't become a fact recently. The only problem with this argument is that gold has been a safe haven in the face of things like inflation and political instability since the dark ages.
Finally, there are plenty of financial instruments and investments in the capital markets that don't have practical use.
Look no further than cash -- aside from being used for campfires, you'd say it has implied value wouldn't you? So why punish gold -- because it's a metal?
Pundit's reason #3: Inflation is falling
Various media outlets reported this headline as a reason, which actually makes sense, because gold is a natural hedge against inflation. But this view is beyond short term.
The Fed has vowed to continue quantitative easing until unemployment drops below 6.5%. This means for the foreseeable future, Bernanke and company will be flooding the markets with artificial capital. This rampant bond buying will cause inflation, the Fed doesn't deny this, it's just a question of how bad it will be.
Artificial market growth via the Fed, and likely interest rate increases are nearly certain to cause rampant inflation, long-term. Commodities are declining right now, but not on strong fundamental merits.
Finally: What "they" don't want you to know.
What "they" don't what you to know, is that "they" don't know -- and that's the scariest reality of all.
There is no real reason that gold should be declining when we factor in all the reasons it rallied, such as:
1. Quantitative easing leading to artificial market growth and inflation
2. Global money printing and record government debt levels
3. Political uncertainty
Has anything fundamentally changed, aside from the price in gold?
Here's the frightening truth. If gold doesn't make sense now, then it never made sense to begin with. Every single catalyst that gold rallied on is still in tact, only on steroids.
It's time we think for ourselves
I've been somewhat bullish on GLD, FCX, and ABX since quantitative easing began. So, I've experienced the euphoria (and now) a bit of heartache. Suffering declines is never fun, but I certainly won't panic now.
Freeport and Barrick are each expected to earn around $4 per share this year, if they meet expectations today's prices will seem like a value. But that will only happen if gold prices stabilize, especially for Barrick.
I think the aforementioned catalysts are in tact, gold is not "useless." If you share my belief, a small position soon could make sense, I prefer the miners (over GLD) because they've fallen further.
That also means they're riskier. This decline, if nothing else, illustrates how volatile speculative assets like gold can be. So in addition to starting small, if you'd like to buy, please consider buying call options that don't expire for a while. You'll limit your downside risk for a small price, and when gold stabilizes you could still make a clean double.