Monday's drop in gold prices was the largest one-day plunge since February 1983 - which led many of those investing in gold to bail on the yellow metal.
Gold prices tumbled $140.40, or 9.4%, to $1360.60 an ounce. This brought the two-day decline to $203.70, or 13%.
On Friday, we outlined recent factors driving gold's price plunge:
- The Federal Open Market Committee (FOMC) meeting minutes that came out last week suggested the central bank may start scaling back its monetary stimulus measures later this year, reducing inflationary pressures.
- Goldman Sachs Group Inc. (NYSE: GS) last week cut its 2013 average gold forecast, for the second time, to $1,545 from $1,610. Investors like to dump the metal after the release of bearish research.
- There have been rumors financially strapped Cyprus was selling 400 million euros of gold, 75% of its reserves to raise cash.
Gold prices ended the drastic two-day decline Tuesday, up nearly 2% to $1,387.40.
Now that gold bulls have been shaken, should gold investors expect more declines in the weeks to come?
We asked Money Morning trading expert and former hedge fund manager Shah Gilani what to do.
As he explained, ditching gold could be a big mistake.
"I don't think this is a bottom, but the way I trade, I love it at these levels," said Gilani. "Another 20% fall is a signal for me to jump in with both feet! I'd add to it down to $1,100. Any further than that, and I'd be concerned, but this is basically a half-off sale."
The Case for Investing in Gold
History shows us that when gold returns from bear markets, it comes back strong.
In 1970, when investors soured on stocks, they started to invest in gold. Gold prices soared from just $35 an ounce to over $650 an ounce - a 1,717% gain.
The same thing happened in 2001, a trend that lasted another decade. Gold prices over that period rose from $300 an ounce to their all-time of $1,910 an ounce in 2011.
Gilani said investors should remember that since gold is both a precious metal and an asset class, there's a profit-taking aspect to the gold selloff that won't last.
Gilani said that the growth of exchange-traded funds (ETFs), which represent pro rata shares of physical gold, and a chance for investors to gain exposure to new instruments, have quite a lot to do with the current collapse.
"Gold is technically overbought," said Gilani. "Apple Inc. (Nasdaq:AAPL) is a good corollary. Because Apple has a lot of small investors, there are a lot of stops. Large investors and hedge funds are taking profits there."
As for how low gold will go, there's no clear answer yet.
"It's broken down. There's no major support right now, and that's disconcerting," said Gilani. "There's shallow support where there is any. $1350 to $1360 should be the new support. The next major support is $1100."
"But, there's going to be a support level," he continued. "I'm not concerned. Could gold stabilize and rise? Yes. Is this an opportunity? Yes. Don't panic."
Don't miss an update!: For everything you need to know about the recent plunge in gold prices, as well as what to do if you're investing in gold, check out all of Money Morning's gold coverage here.
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