Gold's Tumble: Panic or Conspiracy? What's Next?


Since 2001, gold has risen more than seven times in value to an all-time nominal high in 2011 of $1,920/oz. As we all know, the price suddenly fell nearly 15% in two days, and is still bouncing around $1,375/oz. What caused the sharpest fall in the gold price since 1983? Depends on who you talk to. Reasons range from Wall Street downgrades by Goldman Sachs to fears over planned gold sales by highly indebted European countries. Other theories involve a hedge fund in trouble (a gold whale?) and conspiracies involving the Fed and others. Read on to learn experts' opinions on the cause of the fall and the opportunities the downturn presents for investors.

The selloff, though unexpected, has not shaken the faith of many in gold.

One big loser in this selloff has been hedge fund manager John Paulson. His contrary bet on gold is reminiscent of his bet against the U.S. housing market, which made him a fortune. John Reade, a partner at Paulson & Co., said the fund's long-term thesis is unchanged. Reade told the Financial Times, "Federal governments have been printing money at an unprecedented rate, creating demand for gold as an alternative currency. It is this expectation of global paper currency debasement that makes gold an attractive long-term investment."

John Hathaway, portfolio manager and senior managing director at Tocqueville Asset Management, thinks gold has been the subject of "a cleverly orchestrated bear raid." He points out that sales of "paper gold" futures contracts on Friday, April 12, and Monday, April 15, totaled one million. This exceeds annual global gold production by 12%! Hathaway remains bullish on gold, as he too believes that the financial crisis of 2008 has never been resolved.

Chris Martenson, on his Peak Prosperity website, agrees that this dramatic drop in gold prices is a bear raid and a very successful one. He said the raid "enriched the bullion banks at the expense of everyone else trying to protect their wealth from global central bank money-printing." He pointed out that, by January, the major bullion banks had amassed "huge short positions in precious metals." These are same banks that later came out publicly and told everyone that gold was finished and to short it. Martenson told The Gold Report that an unintended consequence of the fall in the prices of gold and other commodities is that deflation is back on the front burner, which will not be good for anyone.

Louis James of Casey Research said that all of the reasons given for the steep drop in the price of gold are nonsense. It was just, plain and simple, a panic selloff and "speculative momentum chasing" by Wall Street's short-term traders. James said, "I've yet to be convinced that the Keynesians are right, that governments of the world have cured what ails the global economy with their virtual printing presses, and that the next boom is a done deal." He recommends gold investors average in and add to their positions.

So what's next for the precious metal? Many are looking for stabilization.

One of the world's major banks, HSBC, issued a special report on Monday concerning gold. In it, HSBC said that it believes gold prices are in for "a slow grind higher" thanks to demand from the physical market.

HSBC cited several factors that would push gold prices back up. First is the expected increase in demand for jewelry from price-sensitive emerging markets. Retail demand for coins is also expected to increase now. Finally, HSBC pointed to decreased supplies coming from both gold scrap dealers and gold miners, as some projects are canceled or delayed due to the lower price of gold.

Finally, HSBC said it still believes gold is an attractive investment for portfolio diversification.

It's not all bad news that gold has fallen in value. Famed investor and believer in gold, Marc Faber, said, "I love the fact that gold is finally breaking down. That will offer an excellent buying opportunity." Although he is also worried about the onset of global deflation, Faber said he will be a buyer of gold at these lower prices and that "the bull market in gold is not completed."

Faber also offered gold investors an important perspective on gold's tumble: "We are now down 21% from the September 2011 high. Apple is down 39% from last year's high. At the same time, the S&P 500 is not even up 1% from its peak in October 2007. Over the same period of time, even after gold's correction, it is up 100%. The S&P 500 is up 2% over the March 2000 high. Gold is up 442%."

The message is to stay the course. As John Hathaway of Tocqueville has said in the past, "Bull market shakeouts are designed to ensure that the fewest number of possible participants will be aboard for the entire ride."

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