Gold’s at a Five-Year Low: Here’s What to Do

Keith Fitz-Gerald Jul 22, 2015
23 

Gold prices crashed Monday as panicked sellers drove the yellow metal to its lowest level since 2002 before recovering to a five-year low. More significantly, they broke the $1,130/oz “floor” which had previously been regarded as a solid support level – a key indicator to me that the downdraft wasn’t over.

So I wasn’t surprised to see gold prices finish yesterday’s U.S. trading session modestly lower – but that doesn’t mean I was any less excited, either.

You’re seeing an enormous opportunity being brought forth by the perfect storm of economic and financial events. Some of these events we’ve known were coming, and some are seemingly random.

Either way, they’re creating an opening you haven’t had access to in years.

Here’s what you need to know about what really caused gold’s plunge this week – and the opportunity no one can know when you’ll have again.

The Most Effective Attack on Gold Prices in Years

Last Monday, traders sold an estimated 33 tonnes of gold in less than two minutes on the New York and Shanghai Exchanges. Their concerted actions sent gold prices crashing by nearly $50/oz by the end of the day, a plunge of almost 5%.

Contrary to what many believe, this was not simply “market action” taking its normal course. This was something far more sinister, concerted, and brilliantly executed – a “bear raid.”

If you’ve just joined us, a bear raid is a highly technical tactic typically used by large institutional traders or “short and distort” artists. The goal is to create windfall profits though short sales, options, futures contracts, currencies, and whatever else can be brought to bear.

If it works, the targeted stock, bond, currency, or in this case gold, plunges, allowing the short sellers to buy back shares or contracts they’ve borrowed and sold earlier at a huge discount. Typically, the sellers work together to establish a massive sale that overwhelms buyers and inflicts huge losses on anybody who’s long.

In this case, traders took advantage of the fact that Japan’s markets were closed for a national holiday, knowing full well that absent their money, there were even fewer buyers than usual to mount a defense.

And what a move it was!

More than 3 million lots traded on the Shanghai Gold Exchange; a normal day is less than 30,000 lots by comparison. Anybody who tried to hang on got clobbered.

The kinds of short attacks are nothing new – though this one was particularly severe. For example, we saw 5,000 December gold futures contracts with a notional value of $640 million dumped at market on October 11, 2013. This caused a five-minute selloff during which more than $2 billion in gold futures traded hands according to the CME. It also caused a 10-second trading halt.

That attack, like Monday’s, was carefully timed to exploit low liquidity conditions. There were no economic reports or industry-significant events when it hit. There just happened to be a slew of stop-loss orders placed at $1275 an ounce.

As intended, the onslaught broke key support levels, took out the stop-loss orders, and created huge profits for the bear raiders. To this day we don’t know who the raiders were because they tend to cover their tracks. Still, a quick scan of the headlines at that time reveals who the interested parties may have been. Not surprisingly, it’s a pretty short list of players having the knowledge and the capacity to mount an attack.

Is it any coincidence that Jeffrey Currie, who headed up commodities research in London for Goldman Sachs at the time, said only three days earlier – on October 8 – that gold was a “slam dunk” sell for the next year? Perhaps, but I’ll leave that to you to decide.

Gold prices finished the day down more than 2.5%.

Click to enlarge

A week later gold finished up 7.5%, to close at $1,361 per ounce as shrewd traders and investors saw the drop for what it really was… more Wall Street shenanigans.

Honestly, it’s too early to tell if that’s the case now. The ease with which traders brought gold prices below its support levels tells me the downward drift isn’t over.

And therein is your opportunity.

You Need Gold in Your Portfolio – But Not for the Reasons You Might Think

Exactly how much gold you should have in your portfolio is ultimately a question to be answered by you and perhaps your financial advisor. But there are some rules of thumb that can help investors reach a balance that’s close to ideal – and it also helps to clear up some common misconceptions along the way.

Many investors think gold is good for portfolios because it’s a good hedge against inflation. This misconception mainly comes from memories of the 1970s, when gold prices grew by a jaw-dropping 2,300% at a time of rampant inflation.

But correlation doesn’t mean causation. Contrary to what all those late night TV commercials would have you believe, gold prices have never been a proven hedge against inflation.

However, it has been proven to correlate to bond prices which are, in turn, an indirect function of interest rates that are themselves an indirect inflation proxy. So what you really want to do is own gold because it hedges the value of your bonds.

Studies suggest that having 3%-5% of total investable assets in gold can provide meaningful protection against rising interest rates while also reducing overall portfolio volatility.

If you’re game for a more sophisticated approach, consider buying $1 in gold for every $10 you have invested in bonds. That will allow your money to approximate the 10 – 1 relationship that’s historically existed between gold prices and interest rates vis a vis bonds.

As for what kind of gold, that varies considerably and is a function of personal risk tolerance, objectives, and suitability. Some people like bullion while others prefer choices like Perth Mint Certificates that help alleviate storage and insurance issues. Even jewelry can be good.

For most investors, though, simpler is better.

Over the years, I’ve recommended SPDR Gold Shares (NYSEArca:GLD) because it’s a highly liquid ETF that directly tracks to price of gold. If you’re hoping to profit from gold prices’ inevitable rebound, it’s hard to get much simpler than that.

If you have concerns about whether or not there’s enough gold to back GLD as some investors do, consider an alternative like the Physical Swiss Gold Shares ETF (NYSEArca:SGOL). It’s a U.S. listed exchange trade fund offering shares that are physically backed by gold stored in secure Swiss vaults.

At the end of the day, get past the fact that we’re talking about gold and get your emotions out of the picture. Doing so will allow you to treat it just like any other asset class.

While you’re at it, think about what Ray Dalio, who founded Bridgewater Associates, one of the world’s largest hedge funds, had to say…

“If you don’t own gold… you don’t know history or you don’t know the economics of it.”

I’ll be back Friday with a report what may be the most severely overvalued stock trading today. Near $60 right now, I see it being worth less than 1% of that.

Until next time,

Keith Fitz-Gerald

23 Responses to Gold’s at a Five-Year Low: Here’s What to Do

  1. Joerg Fink says:

    Very goot about gold !! Thank you

  2. H. Craig Bradley says:

    I imagine your overvalued stock at $60 might just be Facebook, but again, anything is possible and there are multiple contenders for the overpriced category in this liquidity driven bull market. Fundamentals matter little while investor sentiment means much more.

    As far as gold goes, I like Jason Zweig’s recent article in the WSJ about gold as a “pet rock” bought on faith. He mentions that all the financial assets in the world had a valuation of $10 Trillion or so at the end of 2014. All the known gold in the world weighted-in at $1.3 Trillion. So, he figures your allocation to gold should not be more than the overall market’s valuation at about 1% of your total assets. I tend to agree on this.

    • Ed says:

      Hello H. Craig,

      I agree that those values between Jason Zweig and Keith Fitz-gerald are probably good holds BUT, when in more normal markets. Yes, I can be pretty aggressive when the market CHANGES its stance. What I mean is that I can’t wait for the market to turn upward in gold. With (5) years of the downswing, we will probably see a large swing back up again? I don’t know when that will occur but I’d bet on it. This situation to me means opportunity. So with our STOPS in place, we could have a large, long bounce and be protected at the same time.

      I don’t say that this strategy is for everyone but then again…why not?

  3. Dr. Ouarab says:

    I remember few weeks

  4. Roger Lewis says:

    If you can’t hold the gold in your hand, you don’t own it.
    If Obama kills the internet what use is your gold in the Perth mint in Australia !

  5. marina yiu says:

    how about gold coins?

  6. Eugene Price says:

    How about SPPP and CEF also silver as hedges?

  7. Linda Gail Greene says:

    Thanks for the info. I don’t own gold, but I will.

  8. Linda Gail Greene says:

    Thanks for the info

  9. stephen says:

    I had a wod of gold shares that I sold on Monday thinking that the price would go a lot lower .I was in profit on average about 80% on them so not complaining.
    They were all Ausi listed shares so with the Au $ being weak the gold price was not doing to bad in Au dollar terms.At any rate I’m hoping to pick up a similar amount
    at lower prices.See what happens

  10. M B ZAMAN says:

    Hi Gerald…!

    Monday was a well co-ordinated cheating style of trading. Any6ways, Kings are never asked. However, we are listening for the past 2 years that Gold will be taken to the mark BELOW $750/- an oz by America….. while the East is all buying it in tonnes. Some declared and many tons undeclared. Why…? who is right.. East or the US….? and what makes the Gold worthless at this time of the history…..? Has it anything to do with the WW3 which has a target of killing the humanity ( 5000 million people ) by 2018…..?
    ICBMs – Russia, China, NK, Iran vs: the US & the West…..?????
    UKRAINE-RUSSIA-IRAN-SYRIA-SCS-BALTICS-ME. – ALL HOT FRONTS OPEN………?????.

    Kidly throw some light on it.

    Sincere Regards,

    M B ZAMAN

  11. john says:

    where are our regulators, the CFTC, Where are our polititian that allow this to happen? beware “as you sow , so shall you reap” I am not an expert, just a realist and cannot believe this is allowed to happen. JOHN

  12. george parker says:

    China dumped all that gold on the market. Not Sellers as reported in your above article. Are you still trying to buy China?
    The Question is way such a large sell, when they have been buying gold for years up to 4000 tons in the last few years.
    Seems that is something to look into as maybe China bought a ton of shorts before the big sell off.
    Silver is cheaper than gold. Why not invest in it for us less unfortunate investor’s who have not made the money in this market as say the corporate boys and their buyback stock scheme’s with cheap borrowed money.

  13. CAROLTREBATCH says:

    WHICH COMPANY IS SAFE TO PURCHASE GOLD FROM? I AM CONSIDERING PURCHASING SOME FOR MY PORTFOLIO RIGHT NOW I DO NOT HAVE ANY. ALSO, SHOULD I BUY ANY SILVER.? IF YOUR ANSWER IS YES, THEN WHICH COMPANY DO YOU RECOMMEND.

    • Forrest Branton says:

      I have been buying all my silver from JM Bullion out of Dallas, Tx , they seem to have the best prices of all the places I have looked, Provident, GoldenEagle, APMEX, and JMB has FREE shipping with purchases over $99, and I buy more than that whenever I can. I hope this helps you. I haven’t bought any Gold yet, but would buy it from JMB also.

  14. Peter Gilbody says:

    It seems to me that the big major banks are working their book by forecasting, as of today, that gold will fall further, perhaps as low as $800.00. When we read you and the Stansberry people, all are expecting a rebound but is that realistic in view of the words of the Morgans of the world. Perhaps it will be best to turn off all the screens, computer as well as TV (Fox Business comes to mind) and just go to sleep for the next few months.

  15. Robert Hartness says:

    Don’t own bonds and in any case wouldn’t touch gold with a Barge Pole – What’s good enough for Warren Buffett is good enough for me. No dividends from Gold.

  16. larry reimer says:

    DEAR KEITH:
    WHAT EFFECT WILL A FED RATE RISE HAVE ON M-reits such as nly,two,hts????

  17. Don Klinger says:

    I have been playing with holding metals. Currently we own Gold purchased years ago and Silver purchased in the last three years. Looking back now the gold is worth more than we paid for it and the silver is worth less. In considering the purchase of more my thought was to buy Silver but looking at the cost (about 30% up charge over spot for Eagles) I think owning stock is the best way to go.

  18. Barry says:

    Hi Kieth

    I am a bit confused

    u state

    However, it has been proven to correlate to bond prices which are, in turn, an indirect function of interest rates that are themselves an indirect inflation proxy. So what you really want to do is own gold because it hedges the value of your bonds.

    so are u saying gold normally goes down when interest rates go up & gold is a hedge against low interest rates
    but interest rates have been at the lowest of low levels since gold’s peak of 2011, yet that hasn’t stemmed gold’s decline.

    Thanks, Barry

  19. Doug says:

    Barry,

    In the late 70’s/early 80’s when Paul Volker slammed on the breaks, interests rates went up to 18% and gold rose right along with it.

    • Barry says:

      Doug

      I know that but read , pending on who read , that analogy occurred under different times as gold was just legalized to own and no longer can be relied on to be the case.

      Anyway what i am asking is Kieth to please clarify for me my question as it relates to this total wealth article,

      but do appreciate you responding to me

      Thanks

      Barry

    • Barry says:

      Doug

      PS ,

      Bonds for some reason confuse me , I am not at all saying u r wrong, the more I re read the article the more i get confused

      if gold then is a hedge as bond prices go lower ,, and as bond prices go lower when interest rates go up, then indeed what u say should hold & my question to Kieth may be worded all wrong

      I will just have to wait till Kieth gets around to hopefully answering me by being more specific on his correlation directly between gold and interest rates , thats what i would like to know from him and maybe leave the bond value part out

      this is my shortcoming, not questioning your answer which may be exactly what kieth is stating

      Thanks again, Barry

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