Gold and to a lesser extent silver got hammered pretty hard today (Friday) - leading many of our investors to write in and ask why gold prices are down so much this week.
Gold closed Friday at its lowest level since July 2011. In the last two days, gold was off about $79 and silver off about $1.60 at their worst points.
So what's going on?
Well, in the search for answers I can see a few reasons.
It started Tuesday, when UBS cut its average gold price forecast for 2013 to $1,740 from $1,900. UBS cited risks the U.S. Federal Reserve would end its current QE sooner than expected, a move into equities, low inflation, improving economic growth, and a stronger U.S. dollar.
Then Wednesday, the leaked Federal Open Market Committee (FOMC) meeting minutes showed that several members believe the costs of the $85 billion monthly bond purchases outweigh the benefits. We're being led to believe that "many participants" think improving unemployment could justify slowing up on bond-buying "at some point over the next several meetings."
Remember that these are not minutes where members' comments are actually written down word-for-word (like they ought to), these are carefully crafted statements to influence opinion. The Fed is known to try to "manage expectations, so it wants it to look like bond-buying will end sooner than later.
But I, for one, don't buy it.
Nonetheless, that pressures gold prices. And this spooked the market.
Then Goldman Sachs cut its 2013 average gold price forecast for a second time within just six weeks, down to $1,545 from $1,610. Goldman cited an accelerating U.S. economic growth outlook as well as recent weak gold price performance.
And then reports surfaced that Cyprus may sell 400 million euros worth of its central bank gold reserves; nearly 75% of the total.
Cyprus initially denied it was considering any such sale. But then European Central Bank (ECB) President Mario Draghi said Friday that any gold sale profits from Cyprus would need to be used to cover losses it might incur from emergency loans to its commercial banks.
So it looks like the European Monetary Union will get its way with Cyprus' gold in the end.
Although the amount of gold is smallish, the psychological effect of this proposed gold sale has helped to push gold lower. Mission accomplished.
Will Gold Continue to Drop?
All this being said, it's impossible to know for sure where the bottom is.
At this point though, technically, gold appears to have strong support in the $1,450-$1,550 range. Remember, heavy weakness is often a setup for even stronger rallies in the future.
Here's another reason to be bullish: The vast majority of analysts consistently forecast too low and are even predicting declining gold prices farther out.
But guess what?... They've been consistently wrong for years.
Take a look:
What to Do Now that Gold Prices Are Down
My advice: hold your gold and silver.
If you feel you don't own enough, buy in tranches over the next several months.
I believe gold will end the year much higher than where we stand today, and I believe the precious metals bull market will see gold and silver prices much, much, much higher before it's all over. Hang tight. No one said this would be easy, and good things come to those who wait.
Oh, and ignore Paul Krugman.
**The rest of this investment alert included stock picks reserved for subscribers to Krauth's Real Asset Returns investment service. For more on how you can get regular alerts to market moves and profit opportunities in gold, silver and other commodities, check out Krauth's latest report on a looming commodity price surge.