4/15/2013 6:51 PM ET|
Why gold is turning into lead
The sudden plunge in prices has stumped many investors, but you can find any number of theories to explain it.
One thing is for sure -- gold's allure has been tarnished for many investors. Futures for June delivery settled at $1,361.10 an ounce on the Comex, a 9.3% decline on the day and the biggest drop since 1980. At one point, prices slid to $1,355.30, the lowest since February 2011.
Writing in Quartz, Matt Phillips offers five reasons for why gold has become so toxic, ranging from increasing supply to worries about a slowdown in China's economy to a call by Goldman Sachs (GS) to short the commodity. But he freely admits that he found none of them especially convincing.
Ira Epstein, the director of the Ira Epstein division at Linn Group, is quoted by The Wall Street Journal saying gold is losing its allure for investors as the stock market surges.
Peter Stanley, an analyst with Morgan Stanley in Australia, argued in a Bloomberg article that the market was reacting to the prospects that cash-strapped members of the eurozone would have to sell some of their gold holdings and flood the market.
Dominic Schnider, an analyst at UBS Wealth Management, told Reuters that panic selling is being triggered by indications from the Federal Reserve that it would reduce it quantitative easing program, which has helped fuel the recent run-up in gold prices.
Some, all or none of these theories may be proven right.
Gold's sell-off also underscores investing risks that people with gold fever often ignore. First, experts have long dismissed the idea that gold is a good long-term hedge against inflation or fluctuations in currency values. Many investors also don't realize that physical gold, including exchange-traded funds like the SPDR Gold Shares (GLD) that hold gold, is considered a "collectible" for tax purposes and is taxed at a higher rate than other forms of investing.
Gold also has for years gone through periods of booms, such as the 650% rise between 1999 and 2011, and busts. Moreover, as investors become more convinced of their financial futures, they tend to look beyond traditional safe havens such as gold.
As Joe Weisenthal recently noted in Business Insider, this can be viewed as good news because "money flowing into gold-related assets represents a belief that rocks (however shiny they are) are a better place to invest than human endeavors (like stocks)."
Of course, gold bugs probably still see things differently.
Jonathan Berr owns gold through an exchange-traded fund. Follow him on Twitter @jdberr.
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