I know better than to say “I told you so” (see “Gold: Has the Bubble Finally Burst?” from early last week). The market gods tend to be jealous and vengeful and appear to take great pleasure in humbling the arrogant. So I know better than to tempt them.
Besides, even after last week’s bloodletting, gold still is one of the best-performing assets of 2011; the September selloff did little more than erase August’s parabolic surge. And, in the interests of full disclosure, I’ve been on the record as a gold bear since it crossed the $1,200 mark (it was at about that point that the gold bull market entered the theater of the absurd with such novelties as ATM machines that dispense gold ingots).
Still, it would only be appropriate if last week’s action did mark the top. The market gods might indeed have a twisted sense of humor, and Donald Trump’s high-profile blustery rant that immediately preceded the crash would have been a good opportunity for divine smite. After Trump accepted $176,000 in gold bullion as a security deposit from a new tenant, he announced loudly that “It’s a sad day when a large property owner starts accepting gold instead of the dollar. … If I do this, other people are going to start doing it, and maybe we’ll see some changes.” (See “Trump’s New Gold Standard”)
Whether other people follow in The Donald’s footsteps and accept gold as collateral remains to be seen, but if they do, they no doubt will require a few more ounces given the drop in price.
The question on everyone’s mind is “What now?” Does the gold rout continue from here, or can gold bugs look forward to a nice bounce this week?
According to precious metals site Kitco.com, the spot price of gold has continued its downward drift, falling to $1,606 per ounce in Hong Kong early Monday trading. And while anything can happen once the larger American markets open, there is reason to believe this correction has a way to go.
Gold’s parabolic rise in August prompted the CME Group to raise margins on its gold and silver futures contracts on Friday by 21.5% and 15.6%, respectively. Given the recent price action and the uncertainty coming out of Europe, speculators are not likely to risk margin calls with aggressive bullish bets on the yellow metal at the moment. Furthermore, with the end of the year fast approaching, portfolio managers who have profited handsomely from gold’s rise are more likely to take profits than to add to their positions.
But perhaps most damaging is the psychological angle. Both market professionals and retail investors alike have been attracted to gold for its perceived status as a safe haven. But after the wild ride that the price of gold has seen during the past month, its credibility as a haven is almost laughable. What good is fire insurance that disappears the moment your house actually catches fire?