What happened to Gold?
Jun 15, 2006
The recent plunge in the price of gold has caused shell-shocked
investors to second guess their previous outlook for the metal.
However, in the midst of a roller coaster market it can be very
easy to lose touch with the broader perspective. With that in
mind, gold's prospects are as bright as ever, and the sharp fall
likely created one of the best buying opportunities of the current
First and foremost, the recent decline was not a gold decline,
it was not a metals' decline or even a commodities decline. It
was an across-the-board pullback among asset classes, from commodities,
to emerging markets, to the Dow Jones, regardless of their individual
investment merits. The commonality was that the drops seemed
to be proportionate to prior advances, and that the assets were
widely held by leveraged speculators. (The lone exception seems
to have been oil, where its surprising resilience likely indicates
that a significant rally is about to begin.) To me, this was
a liquidity event, with the decline in the price of gold having
little to do with its underlying fundamentals.
For years, leveraged speculators performed their financial high
wire acts secure in the knowledge that Greenspan and the boys
at the Fed were manning the nets below. The protection became
know as the "Greenspan Put." The fear now is that the
"put" may have expired with Greenspan's term, and that
Bernanke has neither the intent nor the credibility to write
With his anti-inflation rhetoric seemingly taking any interest
rate cuts or added liquidity off the table, leveraged speculators
suddenly found themselves out on those wires with nothing but
concrete below. In Wile E. Coyote fashion, a glimpse below caused
reality to set in. As a result, many opted to climb down, requiring
assets to be sold to pay down debts. The result was a reversal
of momentum, causing additional selling, short-selling, stop-related
selling, margin liquidations, and redemptions.
However, my guess is that the markets are misinterpreting the
Fed's resolve or even its ability to fight inflation. Bernanke
really wants to pause, but he is fearful of causing a run on
the dollar by doing so. Therefore he must first lay the ground
work for a pause by convincing the markets of his commitment
not to. His strategy may work for a while, but once investors
call his bluff, he will fold like a cheap suit.
With so many speculators stampeding for the exits at the same
time, it is only natural that prices would collapse. However,
once such selling pressure is exhausted, gold's fundamentals
will re-assert themselves, likely resulting in a spectacular
rise. Having been badly burned, speculators will likely stay
clear of the market until gold forms another base above $700
The biggest trade yet to be unwound is the massive long position
in the U.S. dollar. The fact that a broad-based pullback has
already begun in other asset classes means the dollar could be
next. Such an event would be extremely bullish for gold, meaning
the recent decline in its price could ironically lay the foundation
for its biggest advance.
One anecdotal indication that gold's recent rise may have been
a bit too steep was that my traditionally anti-gold opponents
in a "bull and bear" debate at last month's Las Vegas
Money Show were both bullish on gold. Of course, they were bullish
for the wrong reasons; claiming gold's rise was a result of the
strengthening global economy pushing up jewelry demand. With
these misguided bulls likely to have now been flushed out of
the market, a more orderly rally can resume free from all that
Take advantage of gold's plunge before the opportunity to do
so is gone. Discover the best way to buy it at www.goldyoucanfold.com.
Do not wait for the dollar to plunge too, get out while you can.
Download my free research report on the powerful case for investing
in foreign equities available at www.researchreportone.com,
and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.