How Can You Protect Yourself From The Gold Bear?

by: Balaji Viswanathan

After a 10-year bull run, gold is now falling steeply. At the time of this writing, gold has fallen back to August 2011 levels. Gold ETFs (exchanged traded funds) are seeing an exit of investors. What are some of the reasons for this fall? How can you protect yourself from this drop?

Source: Kitco charts

In each of the past 6 months, the monthly returns for gold has either been negative or has stayed close to zero.

Source: Zingfin: Gold Profile Analysis

Here are some of the primary drivers of this trend:

  1. Pause in Quantitative Easing: Gold is generally used as an hedge/protection against inflation. This is the primary reason for gold's rise in the 2003-07 period (when commodity prices as well as real estate markets pushed up the inflation in the supply side) as well as in the 2009-11 period (when unprecendented amount of new money was created). As the world central banks went about their Quantitative Easing actions, gold bugs were really afraid of the inflation specter. However, we have not yet seen any inflation yet (we could be in store for serious inflation couple of years though). The US Fed has also temporarily halted the quantitative easing process putting to rest some of the inflation worries.
  2. Mainstream alternatives are back: In the period from 2008 to 2012, stock markets and real estate markets went through their worst phase. Investors were clueless and thus were pumping their investments in gold, money which would have otherwise been invested in homes and stocks. Now, both of these markets are bouncing back. Thus, the excess cash that was chasing gold is no longer there.
  3. US economy is limping back: Gold is used as an insurance against crashing economies. Now, US and Asia are slowly limping back. Except for Europe, the rest of the major economies are showing some signs of recovery.
  4. Sale of gold reserves: In the aftermath of the Cyprus crisis, European central banks are forced to sell some of their gold reserves to shore up their balance sheet. Cyprus could be selling a couple of billion dollar worth of its gold reserves and that could drastically increase the supply.

All said, it is too soon to call an end to gold. In the coming days, there could be some profit booking by investors in gold inverse funds. If one of the main European economies, such as Spain, Portugal or Italy were to collapse, gold would have bulls coming back again.

This is a really dicey time for gold and many cautious investors want to move their portfolio away from gold to sectors that have little correlation. If you want to try out ETFs that have at least relationship with gold, you could try out the following sectors.

Source: Zingfin: Gold Profile Analysis

If you are really taking risks and going against gold, you have a few investment choices. Remember that many of these leveraged funds can be quite risky. I would never write off gold nor tell you to diversify all your gold holdings. But, it is time to reconsider the weight of gold in your portfolio.

Source: Zingfin: Gold Profile Analysis

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.