Gold tumbles, disappointing investors who sought a hedge against global woes

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In times of crisis, sell your gold?

It may not make sense to the huge crowd of investors worldwide who have plowed cash into precious metals in recent years, but gold was dumped with most other assets in Thursday’s global sell-off.

Near-term gold futures plunged $49, or 4.4%, to $1,062.40 an ounce in New York, the biggest one-day decline since Dec. 1, 2008. The metal is at its lowest price since Nov. 2 and down 12.7% from the record high of $1,217.40 set on Dec. 3.

Silver and platinum also tumbled, as did oil, copper and most other raw materials in the Reuters/Jefferies CRB index of 19 commodities.

Now, here’s what will annoy gold investors: Many of them bought the metal as a hedge against another crisis in financial markets -- and specifically as a hedge against paper currencies. Given the massive debts that governments worldwide have racked up as they’ve borrowed and spent to shore up their battered economies, gold bulls can make a strong case that paper currencies should be losing purchasing power.

And that’s exactly what happened Thursday with the euro, the British pound, the Mexican peso and many others, as investors fled those currencies. One trigger was another jump in yields on government bonds of Portugal and Spain, as markets began to bet that those deficit-ridden countries would repeat the budget crisis that has hammered Greece since late November.

But rather than reject all paper currencies, some investors and traders continue to place their faith in the world’s reserve currency: the U.S. dollar. The DXY index of the dollar’s value against a basket of six other key currencies rose 0.8% to 79.93, its highest level since early July.

And when the dollar rallies, its archrival -- gold -- usually falls. That’s what happened during the credit-crisis-induced market meltdown of late 2008 as well.

There’s also a simple momentum effect at work here: Commodity traders aren’t thinking about where gold might be in six or nine months if government budget crises spread like wildfire. They’re just thinking about where gold might be a day from now. When the short-term price trend changes in a commodity, in either direction, it encourages a pile-on by momentum players.

“From a trader’s standpoint, we don’t care about the fundamentals in the heat of the battle,” said Larry Young, a senior trader at Infinity Futures in Chicago. “We’re just following the money.”

George Kopp, senior market strategist at LaSalle Futures Group in Chicago, thinks the selling momentum in silver could carry it down to a range of $13 to $13.50 an ounce within 75 days. Near-term silver futures plummeted 97 cents, or 5.9%, to $15.34 an ounce on Thursday. The price had reached $19.33 on Dec. 2.
If he’s right about silver, Kopp said, gold could drop to around $900.

And keep in mind, commodity analysts note, that if Europe were to lead the global economy back into recession, industrial demand for all metals would ebb, putting further downward pressure on prices.
Kopp offers one bit of anecdotal evidence that gold bulls have gotten overconfident: In recent conversations with clients and others, he said, “I’ve never talked to so many people who are holding physical gold and silver.”

But when he suggests that they might want to protect themselves against a plunge in prices by using futures or other instruments to hedge, “Not one person wants to do it,” Kopp said.

-- Tom Petruno