Why Wall Street suddenly hates gold

With the precious metal down some $100, what's driving the panic selling?

By MSN Money Partner Apr 15, 2013 10:56AM

Forbes logoBy Adrian Ash, Forbes contributor

   

A boring story that no longer pays -- that's what Wall Street thinks of gold right now. It's what money managers also think of the financial crisis too. Because whatever gold meant to Wall Street before 2008, it has since come to stand for crisis insurance. And who needs insurance when the stock market is making new all-time highs?


Peaking at $1920 per ounce in summer 2011, when the U.S. debt downgrade crashed into the eurozone crisis and English riots, gold last week sank through $1500 per ounce. It has already extended that drop Monday, falling at one point beneath a 30-month low of $1400. Gold's less precious cousin silver has dropped more dramatically still, losing over 11% during Asian and London trade so far on Monday alone.


The immediate cause of this plunge? Investment bank Goldman Sachs last week advised clients not only to sell gold, but also to sell it "short," betting that the price would drop further (see WSJ). That looks a very smart call, but Goldman was in fact behind the curve. Because by the end of February, money managers trading Comex gold futures had already built up as a group their biggest short gold position since 1999 (watch on YouTube).


Gold ETFs have also gone into reverse (see The Globe and Mail). Backed by physical gold and trading like a share on the stock market, the biggest such trust fund -- the $60 billion SPDR Gold (GLD) -- has shed 15% of its bullion holdings since peaking above 1350 tonnes last December. So professional investors were already losing interest in gold before 2013 began. This latest plunge, below what technical analyst chart watchers have called "critical support" at $1525, will only confirm the view that gold is yesterday's story.


Second-only to crisis insurance, gold's biggest draw for managed money and private wealth alike was what was happening to interest rates. A growing number of investors had spotted what Larry Summers noted when he was first teaching at Harvard, rather than advising the U.S. president -- that gold prices rise when interest rates fall below the pace of inflation (see SSRN). This "real interest rate" case for gold made sense to Wall Street both intuitively (people buy rare, indestructible gold when cash in the bank loses value) and economically (the opportunity cost of owning gold falls when interest rates drop). Sub-zero real rates of interest also offer the one common link between gold's inflationary bull market of the 1970s and the credit bubble and pop background of the last decade, too.


Small Stack of gold ingots Anthony Bradshaw PhotographerBut as gold's link to real interest rates became more widely known, so it became self-fulfilling, and gold prices began moving in lockstep with another measure of real interest rates, the price of inflation-protected Treasury bonds (TIPS). That relationship started to break down in late 2011 (see FT), and it's a wonder perhaps that Wall Street took nearly a year to notice. Harder to blank is the Federal Reserve, and whispers about an end to quantitative easing became something like a shout last week with the release of minutes from the Fed's policy meeting in March (see Forbes). No, interest rates are still slated to stay at zero until mid-2015. Meaning they'll likely stay below inflation for many more years to come. But the direction of real U.S. interest rates in fact turned higher in September 2011, the month that gold hit its current all-time dollar-price high (see Gold News). Wall Street may well be right to see the two facts as closely related.


Nothing about gold has changed of course. But then gold itself was never really the point. Gold has few industrial uses compared to silver, let alone copper. Gold does so little in fact that it doesn't even rust. That made it highly useful as money in times gone by, and it has plainly made it very useful to savers and investors wanting to escape the economic meltdown caused by the financial crisis so far. Money managers have now grown tired of that story however, and looking ahead they'll no doubt point to gold's long two-decade bear market of the 1980s and '90s. Real U.S. interest rates, however, then paid 4% and 5% per year above the pace of inflation. Skipping straight to the end, money managers would also miss the sharp pullback in gold of the mid-1970s.


The gold price in dollars fell in half between Jan. 1975 and Sept. 1976. Lots of savers and professional investors quit in disgust, taking big losses as U.S. inflation receded. But that crisis wasn't yet over. As inflation then outpaced interest rates by a widening margin once more, the gold price rose eightfold to its ultimate top of Jan. 1980. Money managers today may seem complacent, blasé even about the ongoing risks in the markets, let alone the long-term outlook for real interest rates. But gold has been rising so strongly for so long, a big setback now looks overdue. And given the change of mood music on Wall Street, should this drop prove merely a pullback instead of the end, it could still cut much deeper yet.


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60Comments
Apr 15, 2013 11:44AM
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You can usually tell when a commodity or investment has about reached its peak; the shills come out big time. Remember the housing bubble? $50 Silver in the early 80's? And now gold. There's a sucker born every minute, they say.

 

When you hear the shills saying you MUST own (insert commodity), it's time to run the other way. Their sole purpose is to wring the last nickel out of a commodity so the "big boys" can sell and leave YOU holding the bag.

 

I had a friend ask me mid 2012 if he should buy gold. I told him he was 5 years too late. I hope he listened to me.

Apr 15, 2013 1:36PM
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Gold is real, the fake stock market isn't and is going to tank hard.. The stocks are only high because of unnaturally low interest rates, bailouts, moochers getting handouts like foodstamps and the endless money printing.

 

I'd rather be holding gold than worthless paper when it happens.

Apr 15, 2013 3:31PM
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When I saw Glenn Beck and other celebs hawking gold I knew it was already too late to "get in" and the big boys were in the process of dumping theirs at the highest price possible. The small investors that "got in" were just sheep for the slaughter.

 

I would never consider gold as an investment though, maybe just want a little around in case of a complete breakdown of our economy. That and a good, reliable hunting rifle and ammo.

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Classic pump and dump.  Who bought at the top?  Probably 90% of the amateurs out there.
Apr 15, 2013 3:38PM
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The Leveraged Hedge Fund Merry Go Round:

 

We gotta sell gold to cover our stock margin calls

We gotta sell oil to cover our gold margin calls

We gotta sell stocks to cover our oil margin calls

We gotta sell everything to COVER OUR A$$!

Apr 15, 2013 2:47PM
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I wonder how many of these azzholes that are constantly on TV hawking gold and silver will be in hiding in the Caribbean later this year?
Apr 15, 2013 2:14PM
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I am not a gold bug but I do think silver has value as an industrial metal.

I see that the spread between spot silver and US Mint coins has become larger, i.e.

they are not dropping the prices for US silver currency nearly as much as the spot.

 

These leads me to believe (my opinion only) that small investors/hoarders are still acquiring

silver coins and that large investment firms control the ETF's and exchange prices. I have read

several analyses that actual silver production costs will eventually provide a floor for silver and

copper and that floor is much closer than two months ago.

 

One begins to wonder if the large investment firms/hedge funds etc. stopped investing and started

betting after the 2001 bubble bust. The game seems fixed us against us. Coin buyers are taking physical possession as opposed to owning the ETF's.

 

Apr 15, 2013 4:28PM
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I'm buying gold when it gets below 800......it's only a matter of time before SHTF
Apr 15, 2013 4:32PM
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And what do you want to bet, that Goldman Sachs is all bought back in already
Apr 15, 2013 3:10PM
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Other than its use as a raw material, gold is only worth as much as the next guy is willing to pay. Point in case, gold being sold at a premium as a "special minted coin", rather than the spot price for its purity/weight.  All the gold in the world will not buy a glass of water from another person in the middle of the desert. Actually, a person in a vintage Twilight Zone did sell his water for gold in the desert; when he thirsted, the person with the water refused to sell. The fool died of thirst..

Apr 15, 2013 5:04PM
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'Wall Street' Banks and Brokerage's have been conducting a war on gold and acting as proxies for the 'Fed' since gold's re legalization in the 1970's because gold takes money out of their system of fee's and commissions and it's the only form of wealth that has no counter party risk - it's not dependent upon someone's promise to pay and is not someone's debt, it cant be IPO'd, can't be printed, no secondary offerings, no buyouts, no mergers.  As far as 'Wall Street' is concerned it's 'Anti-Money' and  is hated  by the paper pushers and creators of debt.
Apr 15, 2013 2:21PM
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Like the Chief...Like the Indians...the saying says......

Just look at the top of our Country...who is running it...or who is ruining it...???

Everything is fake...the stock racket... Fed printing money...obamadon'tcare...don't agree I'll drone you..............Gold is Gold...

 

Apr 15, 2013 11:13AM
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Buy gold.Then watch it go lower.The people I trust say don`t buy until it goes down

to $200 an ounce.The gold bugs are on suicide watch.

Apr 15, 2013 4:12PM
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-265 in the market today and a bomb went off at the Boston Marathon - American let me paraphrase - look away, look away, look away a bomb went off - while you looked away they stole your money -265 today! 2008 called and said hey remember me, I'm back to take the rest! 
Apr 15, 2013 3:53PM
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All my friends  Saying also  the manipulators are playing donkey with the investors just to see how far they can push to create another ceiling crash with a ballooning bubble
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What ???

 

Look two things are going on to lower the price of gold there has been a lot of dumping of gold in the last few months.

 

Cyprus central bank is selling off it's gold to come up with cash it needs very badly

 

Everyone who brought gold to trade with Iran for oil knows that the US government is monitoring gold transfers and has already punished a few countries for trying it.

 

So everyone who brought gold thinking to buy Iran oil is now dumping it.

 

Also it would not surprise me that Japan and others (read as Spain, Italy ) are also dumping gold right now to try to get cash those countries so desperately need.

 

When the US economy totally collapses everyone who has sold gold now instead of buying it will regret it.

Apr 15, 2013 3:31PM
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The book is titled " The End of Growth". It was written by Richard Heinburg and it was published over two years ago.

Now go read it and learn the truth.

Apr 15, 2013 4:47PM
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The 'panic selling' is another market manipulation ploy by the Oboob adminstration and the Fed to dump naked shorts to make the dollar actually look like a 'safe investment', which is quite laughable in its own right. But there is not near enough actual physical gold to cover these NS bets, so the whole thing is going to blowup in "Benny Bucks" Bernanke's face. Just another attempt to kick the can of accountability down Reality Road a little further.
Apr 15, 2013 2:33PM
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Gold is, and always will be, a excellent hedge against inflation. But you have to sell it, at the high pt., for that concept to work. I'm surprised that Goldman Sacks waited this long to pull that trigger to short it, but that's the way you protect yourselves from market volatility, no matter if it's from Europe or here in the USA.

 

Now we have all the whiners that didn't get out in time- spouting the 'evils' of gold. Idiots ! You don't go long on gold- never -ever ! You MAY get another chance to get back in soon but since the volital summer months are almost upon us-don't count on it till the fall.

Apr 15, 2013 4:16PM
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Following the February long-term sell signal, and the secondary signal elicited at the end of last week (Friday, April 12), Comex Gold (June) is very close to testing its 1353.30, 3-5 week target objective, which can contain selling through May activity. Keep in mind we expect the 1285.60 – 1303.90 region over the next 8-12 weeks (days?), with later 1213 allowing 1086.50.

Gold ETF and Futures analysis for April 15, 2013  http://youtu.be/O5sFsOlm9WA
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