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Oh, the Crazy Lies Gold Investors Tell Themselves …

It has been a very bad week for gold prices. Although the precious metal has fought back to above $1,400 an ounce, gold prices have plummeted from around $1,900 in 2011 to tally a 25% drop in about two years.

The fact that this is against the backdrop of a resurgent stock market recently setting new highs is only more uncomfortable for goldbugs.

But rather than capitulate, there are a lot of gold traders making up excuses for why the gold trade has gone south in 2013. Here are a few amusing “reasons” I’ve found lately that are worth pointing to:

Don’t Worry, China’s Consumers are Here

Just this morning, I got an email from a PR flack saying that “Dillon Gage says Asian consumers are buying gold jewelry at this month’s lower prices,” and that gold is “in the process of bottoming” thanks to “bargain hunters.” Oh really? Silly me… I was worried that  John Paulson unwinding a multibillion-dollar gold play would move the markets.

Apparently Chinese consumers buying necklaces will create enough demand to offset hedge funds who are panic selling.

It’s Paper Gold That Fell, Not Real Gold

As far as an oversimplification of the gold market, I like this one even better than “Asian bargain hunters will create a demand floor.”

The idea goes that people shorting gold are just market manipulators playing with paper (or if you want to get in the 21st century, digital) versions of gold and not physical bars. Dealers report red-hot sales, after all, and nobody coming in to sell krugerrands or eagles.

Unfortunately, this fails to acknowledge that the biggest reason for the run-up in gold was the ease of trading provided by “paper” investments like the SPDR Gold Trust ETF (NYSE:GLD) that held the physical bullion for fund investors. Saying these GLD investors didn’t own gold is like saying I don’t own stocks because I own the SPDR S&P 500 ETF (NYSE:SPY).

It’s a Conspiracy

The great thing about betting on gold because the government is corrupt and evil is that when gold prices sour, it’s also because governments are corrupt and evil. That’s why “experts” (the term is used loosely) like Paul Craig Roberts contend that central bank manipulation is behind gold’s collapse.

But don’t worry, the scam will be found out eventually … and all will be well.

The Truth Hurts

Look, it’s hard to speak truth to any group with a rabid following. Yankees fans, Subaru owners, fans of Justin Bieber … they all see what they want to see sometimes.

I don’t pretend to know for sure what’s in store for gold any more than I know for sure what’s in store for any other investment class. But that’s they key here — to admit that gold is an investment, and this asset is in many ways no different than stock in Apple (NASDAQ:AAPL) or corporate bonds from Exxon Mobil (NYSE:XOM).

There is a market, full of many speculators and investors with many different views and motivations.

If you believe that gold is somehow “different” or that this decline is different from other bubbles and painful investment decisions … well, then I can’t help you.

The important thing is to think rationally about the short-term and long-term potential. And given our modest rate of inflation, a strong dollar as a safe haven, cascading redemptions in gold funds and general market pessimism, it seems at least prudent to admit that this decline was not a fluke.

Or more importantly, that this decline could only be the beginning.

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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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