With gold prices down 24.4% today from their record close back in August 2011, the "yellow metal" has entered a bear market of its own.
It took an especially ugly day last Monday to get us to that point, when gold prices plunged as much as 9.7% - the biggest decline since 1980. That continued a sell-off that saw the yellow metal fall by 4.7% the week before, including a 4.1% drop last Friday.
To get some expert insights on this sell-off, I telephoned Peter Krauth, our resident natural resources expert and editor of our Real Asset Returns research service. Peter based himself in Canada to be closer to the miners and natural-resources companies he covers for his subscribers.
I asked Peter for insights on the following three questions:
- Why this is happening.
- What you can expect from here.
- And what investors should do.
Peter said there are at least four catalysts that are fueling this historic sell-off, including:
- How the Cypriot Gold Dump Could Ignite Follow-The-Leader Fears: Cyprus is going to sell about $550 million worth of its 13.9 metric tons of gold reserves to help finance its bailout. That amount, by itself, isn't enough to increase the world supply. But it sends a message that some of the other struggling Eurozone players may pursue the same strategy. Such Euro-Wheezers as Portugal, Ireland, Greece, Spain and Italy together hold an aggregate 3,230 metric tons of gold - three-quarters of which is held by Italy. Even with the sell-off we've seen, all that gold is worth about $145 billion. That won't put a dent in the trillions in debt these countries owe. But the bailout plans only require them to contribute a small percentage (with Cyprus, it's 3%, for example), meaning the gold sales would be an easy way for those countries to raise the needed cash. "That realization has the gold market spooked," Peter says. "But the reality is that the central bankers around the world are net buyers - and will continue to be as global debt levels continue to rise ... Gold is the single-best store of value on the planet, and that's not going to change."
- The "Packaged" Messages From Team Bernanke: After performing their usual CSI-like postmortem on the latest set of U.S. Federal Reserve minutes, central-bank watchers concluded that Team Bernanke could curtail, or even switch off the quantitative-easing spigot much sooner than had been expected. "The fear is that such a move would put a kibosh on inflationary fears, and probably push gold prices down even more," Peter says. "But the Fed actually only said it may curtail QE, not that it would. Besides, it's basing its assessment of the health of the U.S. economy partly on the official unemployment rate. And that statistic, as we know, has become increasingly more flawed as time goes on. The truly weak status of the American economy can't be covered up forever."
- The Fear That Buying Gold Here is Like Stepping in Front of a Train: One pundit quoted in a news report yesterday said that "nobody wants to step in front of a speeding train" - meaning no investors want to buy gold right now. Indeed, panic selling has gripped the gold market, leading many pundits to say that there's no bottom in sight. Gold-backed ETFs are being forced to sell bullion to cover the redemptions, and that selling is exacerbating the decline. And the continued decline is then triggering "stops" and margin calls - forcing additional sales, and furthering the sell-off. "In markets like this, you eventually get to a point ... to a level ... where there's really no one left to sell," Peter says. "When that happens ... when you've reached such a market extreme ... the forces are much more likely to be to the upside. Prices can't fall to zero; when they fall below the price of production, market forces will force prices higher."
- Market Manipulation: Big investment banks like Goldman Sachs Group Inc. (NYSE: GS) have been forecasting lower gold prices for some time. And now that prices are falling, instead of taking a victory lap and taking credit for having made a correct call, Goldman and others are once again slashing their target prices. "In a panic-selling market like this one, they know this will become a self-fulfilling prophecy," Peter says.
"It's the best insurance you can find against government stupidity," he explained, "including the ill-advised ongoing overprinting of fiat money. Gold has an intrinsic value, and can't be devalued by overprinting. And it's sure to rebound because I have no doubt that governments around the world will continue to do stupid things."
Given these views, I asked Peter what investors should do. We talked about four ultra-specific moves you absolutely must make right now if you want to profit from this special situation.
Remember, moves like come around rarely, and if you know how to take advantage of them, the upside to investors is well beyond normal gains.
- Remember that gold is a financial insurance policy. Peter shows you how to buy this insurance cheaply to offset the likely event of debt and dollar correction, which is due to be large.
- Perhaps the best gold trust you can at this moment. It's so far undervalued that it's a screaming buy, even if gold were to fall to $1,000.
- Gold stocks... yes, there are two that are set to jump. May be hard to believe, but the leverage potential on any upward move in gold prices could turn these into historic plays.
- One immediate and little-understood play that runs inverse to gold. You go long in the short run and short in the long run. Few people understand how to make money on this, but Peter has the full story.
But because this is an unusual situation, you can see my Private Briefing here, free for a short time. Just go here now and you'll be able to get all the details.
Best Regards, William (Bill) Patalon III
Founding Editor, Money Morning's Private Briefing
P.S. My Private Briefing recommendations have generated triple-digit winners, four takeovers and nearly 70 winners in all. I invite you to see for yourself at zero cost. Just go here.
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