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Why Gold Has Turned Into Paper.

One of the most amazing things that has happened in the global capital markets in the past month is that gold and silver have turned into equities.

You know, those precious metals that were supposed to be a store of value and a safe haven during troubled times? They have morphed overnight from hard assets into paper ones, with the barbarous relic nosediving $100 from $1,800, or 5.5%, in less than four weeks, while the white metal is off nearly $3.50, or 10% from its September $35 top.

The advent of QE3 on September 13 turned out not to be the ground floor of a new move into risk assets, but the "Bernanke top" of a four-month move-up discounting such action. It was one of the greatest "buy the rumor, sell the news" moves of all time. Since then, gold bulls have been left awaiting new incentives to take the barbarous relic higher.

Another recent drag on gold prices has been the poor performance of the giant hedge funds, like the one run by the subprime hero, John Paulson. He has gotten into big trouble with ill-advised holdings in financials and is unloading everything else to meet margin calls and expected redemptions. What are his largest remaining profitable positions? Big longs in gold, silver, and the miners of such.

Precious metals may not have long to wait for a respite. The November 7 presidential election promises to lift a major part of the uncertainty now plaguing the markets, no matter who wins. An Obama victory would be especially positive for gold and silver, as it assures another four years of Bernanke style quantitative easing.

The price action has been like a flash fire in a movie theater, frying the gold bugs in the process. The good news in all of this is that a big part of the drop is behind us. The bad news is that we may have another week of such liquidations before we reach the election day bottom.

Note to Indian subscribers: Will more of you please get married and provide some end user support under the distressed yellow metal? We are in the midst of the fabled Indian wedding season after all.