When stocks fall by 20% or more from their peak, it's labeled as a "bear market."
With gold prices down 26% 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 on Monday to get us to that point.
Two days ago, gold prices plunged as much as 9.7% – the biggest decline since 1980 – and continued a sell-off that saw the yellow metal fall by 4.7% last week, including a 4.1% drop on Friday.
The metal has now fallen 26% from its Aug. 22, 2011 settlement record of $1,888.70.
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.
He was as accommodating as ever.
"Bill, it's been ugly – really ugly – there's no question about that," Peter said. "But there's an interesting twist to this, one that I'm glad we're taking the time to talk about here. You see, I really believe this is one of those situations that investors would do well to drill into. In fact, I will go on record here and say that I firmly believe that investors who take the time to understand the forces at work here, who take the time to find the right profit opportunities, and who are willing to take the long view will end up being well-rewarded for having done so."
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."
- Nobody Wants to Step 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.
Despite the sell-off Peter says gold should be part of every portfolio.
"It's an important holding," he explained. "It's the best insurance you can find against government stupidity … 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. The gold bull market isn't over … not by a long shot."
Given these views, I asked Peter what investors should do. We talked about the moves you can make right now.
Among them, he detailed four solid gold and silver investments you can buy at a discount now, including two that he called "Special Situations."
What makes them special is that they're gold-mining stocks that stand to gain (and gain big) even if gold prices don't rebound.
Each recommendation offers investors a massive potential upside because of projects they're working on, and internal changes they're making – which, once fulfilled, could more than offset the declines we've seen in gold prices.
So if you have ever felt that your holdings were light on gold, but the high prices kept you at bay, now is the time use the sell-off to start establishing new positions.
I've detailed exactly how to do just that in a Private Briefing alert I sent out just yesterday.
To read that alert and take advantage of a free two-week trial to Private Briefing, click here now.
In just 18 months, ourrecommendations have generated two triples, four doubles, four takeovers and nearly 70 winners. The stocks we've recommended based on the sell-off in precious metals are just the latest picks that we expect will pay off big in the long run.
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.