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.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market capped the trading week with losses across the major averages. The S&P 500 fell 0.5% to surrender its weekly gain, while the Dow Jones Industrial Average (-0.7%) and Russell 2000 (-0.9%) underperformed. The two indices posted respective losses of 0.8% and 0.6% for the week.
Equity indices were pressured from the get-go after several heavyweights disappointed the market with their earnings and/or guidance, which led to some broader profit-taking. After ... More
More Market News
The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'