4/15/13 3:55 PM – Gold Falls Hard in Two Days

Between Friday and Monday, the price of gold has fallen 12.75%. Why?

1) Cyprus is considering selling some of its gold to help pay for the bailout. While that is a relatively small amount, there are worries that bigger countries like France and Spain might consider that too.
2) Gold is mainly a hedge against inflation, which people worry about with central bankers printing so much money around the world but after four years of that, inflation in developed countries is still very tame, mainly because Europe remains in recession and the U.S. is not exactly setting the world on fire. Even China’s growth rate slowed slightly in the latest report today.
3) Demand from Asia, a large source of demand has been slowing recently
4) Goldman Sachs, a very influential investment bank, just turned bearish on gold
5) A large institution sold a great deal of gold on Friday, starting the price drop
6) Margin calls get triggered when something bought with leverage suddenly drops, adding to the selling
7) Selling generates selling as people rush for the exit or stop loss orders trigger. Gold has no earnings and pays no interest so its price is set purely by supply and demand that depends on sentiment, which can be very fickle

So, should you buy gold or sell gold right now?

As far as selling, if you have a sell discipline that says if something drops by X percent you sell it and ask questions later, you either sell all or a portion or you at least take a fresh, hard look at the outlook, realizing that all the information you want may not be presently available to aid in your decision.

As far as buying, it is usually best to be patient. It is dangerous to guess at what price something that is dropping will level out at. In the absence of fundamentals to go on, it is hard to put a floor on a commodity price. You have to rely on the price action to guide you.

If you are a long-term buyer of gold, this creates a chance to add to your position at a lower price.

I am not selling today. This smells like a panic and I am skeptical that countries will actually sell gold to raise money. I may add to our small gold positions because I do believe that in the very long term – 10-15 years, gold will be highly in demand.