Metal Fear

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3 Reasons Gold Is Falling Like a Lead Balloon

Gold remained handily under the $1,300 mark Monday, giving it a roughly 7% slide in the past week and a drop of about 28% from its September 2012 highs of around $1,800 an ounce.

From the September 2011 peak — which briefly topped $1,900 an ounce — gold is off almost 35%.

Some continue to talk down this crash as an object of “paper gold” investors dumping exchange-traded funds and other instruments, while “real gold” investors in bullion are hanging on to their assets.

The problem, however, is that paper or not, the crash is costly — and investors don’t want to mess with this trade in the short-term.

Here’s what’s working against gold:

Higher Rates Will Attract Low-Risk Investors: Tom Kendall, head of precious metals research at Credit Suisse, told CNBC, “One of the big fears now playing against gold prices is the fear that we’re going back into a world of positive real interest rates.” After all, if you want a safe haven, why not Treasuries once they start to yield a decent amount again? They’re already pushing north of 2.6% — more than 100 basis points higher than a year ago.

Cascading Redemptions in Funds: The flagship SPDR Gold Shares (GLD) ETF ended May with about 11% less in assets than April. And once we get the numbers for June, you can bet that amount will be even less. About $55 billion has been erased from exchange-traded gold products like GLD since January. When those redemptions hit, funds have no choice but to sell gold to deliver cash back to investors — and that results in a downward spiral on prices at the worst time.

No Relief in View: If you want to know how ugly things have gotten for gold, consider Newcrest Mining (NCMGY), which just wrote down the value of its mines by $5.5 billion — the biggest one-time charge in gold mining history. There is much speculation that major miners Barrick Gold (ABX), Newmont (NEM) and others will soon follow. If miners are admitting their reserves aren’t worth as much as they had hoped … that doesn’t bode well for gold investors. After all, it takes time to extract those reserves from the ground, so the admission of reduced prices acknowledges that the gold market will be soft for some time to come.

There still are those who are bullish on gold, and who think it will rebound from the bottom. But based on these negative factors, bargain hunting in gold is a very dangerous activity right now.

Related Reading

  • Marc Faber still likes gold, of course. (CNBC via Yahoo Finance)
  • Some pain ahead for gold miners, based on $17 billion in writedowns. (BusinessWeek)
  • I’ve been warning against buying gold for a while — here, here and here. (The Slant)

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at 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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