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Gold Investors Are About to Get Buried

Gold prices are around $1,560 an ounce, their lowest level in about a year and down about 13% from highs around $1,800 an ounce last fall.

And it looks like we’ve only seen the beginning of the gold price declines.

Last week, we learned of massive gold outflows in ETFs, particularly the SPDR Gold Shares (NYSE:GLD), which was No. 2 on the March redemptions list. It boasted outflows of $1.68 billion for the month, and led all redemptions in the first quarter with outflows of $6.62 billion.

The smaller iShares Gold Trust (NYSE:IAU) — which “only” has $11 billion or so in assets — also saw outflows, though not as dramatically.

This is ugly news.

I’ve written before on the idea of cascading risk and what it means for goldbugs. You see, when assets are pulled out of a stock fund or a bond fund, the money is wound down across a host of investments — and frequently, other funds of different flavors can also share exposure to those assets.

But when a pure gold fund suffers a redemption, it has to sell gold. That results in the fund dropping further, since the underlying asset is out of favor. This in turn results in more redemptions — and a vicious cycle of negativity that might be hard to break.

Throw in a persistently strong dollar, which has kept a lid on commodity prices from oil to steel, and it’s difficult to see gold moving higher.

Systemic problems like this in the market for the precious metal like this have led Societe Generale to declare “the end of an era” for gold investors. And more recently, Goldman Sachs made the case for shorting gold even at current levels with a long-term forecast of just $1,200 an ounce by 2017.

Another bad sign: Mark Hulbert’s Gold Newsletter Sentiment Index is at a historic low since the inception of the survey in 1997.

Gold miners also have been obliterated in 2013, with the broad-based Market Vectors Gold Miners ETF (NYSE:GDX) down 25% this year. Major miners under pressure include Goldcorp (NYSE:GG), which is down 14% since Jan. 1; Randgold Resources (NASDAQ:GOLD), off 17%; and Barrick Gold (NYSE:ABX), down 30% this year.

In other words, gold hasn’t had a good year.

There is one ray of hope, however, for the contrarians who like the metal as an asset class. Correlation of the precious metal has finally begun to diverge significantly from the S&P 500, making it truly a differentiated investment that could provide another tool in your tool box.

The problem, of course, is that the S&P has been going like gangbusters since last fall while gold prices are off double digits.

So if you’re looking for a contrarian investment with a beta below zero, the yellow metal appears to be it right now. Unfortunately, the market that gold’s moving opposite of just happens to be going up all the time.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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