After posting 12 consecutive annual price rises, gaining more than 500% over that span, gold (GLD) is suddenly being shunned by investors who once saw it as a way to generate outsized returns without the volatility and uneven performance in the stock, bond and real-estate markets.
Although the hardest asset of them all, it has always been one associated with emotions. A lot of investors have a kind of a love-hate relationship with gold. However, I could safely say that gold is the most misunderstood of them all.
Last Monday, gold suffered its biggest one-day decline since the 1980s as the metal extended its dive into a second-straight session and pushed further into bear-market territory. Monday's loss comes on top of Friday's selloff, when gold lost $63.50 or 4.1%, to $1,501.40 per ounce.
Mining producers were hit hard by the selloff with shares of Newmont Mining (NEM) -0.41% down 5.80%, Barrick Gold (ABX) -0.92 down 4.65% and Yamana Gold (AUY) -0.22 down 1.85%, as resource stocks led the S&P 500 index SPX +1.43% lower Monday afternoon.
Prices saw its biggest one-day percentage drop since February 1983. Gold's one-day dollar drop was the second largest in its history. However, the precious metal rebounded Tuesday morning on international markets. As it is often the case after a sharp selloff, short-covering is leading the rally. Gold was trading at $1,365 per ounce level in the afternoon.
On the international markets, the drop could not have come at a better time. For India's buyers, as they enter the wedding season, a traditional time for high volumes in the physical gold market, the drop in gold prices is more than welcome. Overwhelming demand for gold in India has contributed to a sharp rise in imports widening its current account deficit to 6.7% of gross domestic product in the last three months of 2012.
Moreover, one Beijing physical gold firm reported a 60% to 70% rise in demand because of the lower prices. According to the World Gold Council, India and China together account for more than a third of global gold demand.
Are we on the threshold of a major panic? Hard to say. If Mr. Bernanke weren't fearful of another panic, he wouldn't be throwing another 1.2 trillion bucks into circulation this year, you will say. I believe that he knows as well as anyone, how fragile the entire economy really is. One of my articles was discussing the Fed's monetary policies related with gold. You can get an idea going forward by reading it here.
Investors would be wise to hold their positions. The fundamentals for gold are still strong against a backdrop of financial woes in Cyprus and geopolitical tensions surrounding North Korea. The significant selling by the major players in the market were fast and large sales whilst the real buyers are slow and small. Over time, real buyers should re-establish an uptrend.
Therefore, on the contrary, I believe that investors should get ready to buy gold at a discount instead of selling at bottom prices, with the objective of achieving or preserving a 2% exposure in their portfolio. Investors shouldn't worry too much about the downfall of the last two days and should instead take this opportunity to consolidate their assets in the yellow metal with appealing discount prices.