In many respects ETFs like the SPDR Gold Trust ETF (NYSEARCA:GLD) and iShares Silver Trust ETF (NYSEARCA:SLV) should never have been created in the first place. The gold mining industry was a big fan of these ETFs as it sought to make owning gold available to the masses. My thinking is that the only way to invest in gold and silver is to go buy some coins, bars or jewelry. Gold or silver is to be bought and forgotten about.
I'll give you an example of this. I spoke with my cousin this morning and asked him what he was doing with his gold. He's one of the smartest buy and hold investors I know and bought several thousand ounces of physical gold around $300 an ounce. He's got a big profit. I asked if he thought of getting out in the past and his response has always been the same, "if I sell where I am going to put the money?".
You see it's a small portion of his overall portfolio, along with stocks, bonds and real estate. This is how investors need to look at not only gold and silver, but any asset class. I can assure you in India that Indians are not panicking over this price drop. If anything, they're relieved because now they can actually buy gold for much cheaper than they would have last week. They always buy gold. It's what they do.
By having the gold and silver ETFs, it's all paper. Investors see it on their daily portfolio list and make irrational decisions. What should be purchased as a store of value is now just a paper asset to be bought and sold with a point and a click. And in this arena we now have the high-frequency traders that are constantly trading gold because of its enormous volatility.
What the ETFs have done is taken away gold's function as a store of value. I read an interesting comment that said gold can rally this year if equities go down. If this is the case explain to me then why equities dropped this week as gold was getting crushed. It's because the investors in gold were getting hit with margin calls and they sell what they can. When people are losing money, they're not that selective in what they sell. The margin clerks are making them sell what they can!
For investors in gold and silver before they panic or sell, they must ask themselves what changed on Friday. I've been trying to find that answer and I can't find it. Now the media will tell you that it's because China data, US data, Cyprus selling (my favorite!) etc. To me that's all BS. Nothing changed. There was no reason for gold to drop over $200 in 2 days. Bernanke is still printing money. Japan is cranking up the printing presses. Carney will start soon when he takes over the Bank of England. The fundamental picture is still the same.
Outlook For Gold And Silver
In the short term, the low is not yet confirmed for gold and silver. Markets that have experienced such a violent selloff will always go back down and test the lows. This bounce in gold will be sold into by traders that still need or want to get out. Traders in gold are on an emotional roller coaster right now. They are not thinking rationally.
For long-term investors that believe in the gold story and have not bought yet or want to add to their positions, they are thankful for this selloff. They are able to buy $200 an ounce cheaper than they were last week. In Asia demand for physical gold is strong after this selloff. In Asia gold buyers take a long-term approach with gold and they are using this selloff to add to their holdings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.