Gold (GLD) (DGP) investors have been worried since the beginning of the year over the decline in the per ounce price of the yellow metal. Even more confounding is its inability to act as a hedge to the stock market as gold is supposed to trade inversely to the broader market.
But this is all about to change over the coming months.
In Greece, the ECB has stopped providing liquidity to Greek banks which are not sufficiently recapitalized. Bank runs are occurring in Greece and Spain as depositors flee those institutions which appear to be either nationalized or without backstop from the ECB.
Ratings cuts by Moody's on Italian banks with Spanish banks along with Fitch lowering the credit rating on Greek debt citing the risk of a euro exit have raised the fear factor among investors.
Money is now flowing out of stock markets and they have very few options available. Do you move into European banks? Not based on the news this week.
Would you place your cash in European sovereign debt? Given the risk from a potential Greek exit from the EU and problems in Italy, Spain and Portugal that option is highly unlikely.
You could place your money in U.S. banks but given the recent loss at JPMorgan (JPM) that calls that strategy into question.
U.S. Treasuries are an option but with yields at their present lows they provide what Jim Grant has coined "return-free risk."
The stock markets across Europe have fallen as risks from Greece and Spain begin to properly price themselves into the markets. The U.S. markets like the S&P 500 (SPY) and Nasdaq (QQQ) have lagged behind on false hopes that economic growth will be strong enough to decouple from the world but recent economic releases have caused that theory to be rethought.
For more than a decade now gold has provided yearly gains without a loss and while some may state that gold is in a bubble they could not be farther from the truth. A bubble would imply that everyone is rushing out to buy the yellow metal. Even at the peak last summer my local jewelry store had lines of people wanting to sell rather than buy. In contrarian fashion that indicates the bull market is far from over.
Central banks around the world continue to add to their gold stakes with China, Russia (16.5 tons purchased), Turkey (11.48 tons) and Mexico (16.8 tons) making major purchases during the first quarter. Argentina made its first purchase since 2005 with the Central Bank adding 7 tons.
While we are into a seasonally slow month for gold the downside risk is limited and as Thursday's moves show the tide can turn quickly leaving investors shell shocked.
Disclosure: I am long DGP.
Additional disclosure: I am also long an Asian Gold ETF which tracks the SPDR Gold Trust in Hong Kong.