When ‘As Good As Gold' Is Not

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There’s fool’s gold—pyrite—and then there’s fool’s gold—gold owned by idiots willing to trade it for worthless dollars.” ~ Jarod Kintz

Some blame Cyprus.  Others blame China.  Yet others blame the U.S.  Regardless of whom you choose to blame, the price of gold has declined in the last two days of trading from $1,561 per ounce on Friday, 12 April to $1,361.10 per ounce, including a drop of 9% today alone.   Combined commodities on the S & P GSCI Spot Index fell 23%  to their lowest levels since July 2011.  This was the biggest 2-day plunge for gold in 33 years.  Silver lost 12%, closing at $22.71 per ounce

On 10 April Goldman Sachs began warning investors to sell gold.   Part of that warning may have been based on the expectation of Cyprus selling gold to raise cash to bail out its troubled economy, as well as the possibility of other EU nations following suit to help cover their portion.  On 11 April, another warning came as Fitch lowered its long-term, local currency sovereign credit rating to A+, citing China’s burgeoning debt.

Camilla Sutton of the Bank of Nova Scotia warned that “When gold begins to fall, it sparks margin calls, and then it’s a vicious cycle.”  Julian Jessup of London’s Capital Economics had an interesting perspective, saying that “The trigger for the slump in the price of gold since Friday appears to have been aggressive selling by speculative traders, rather than any change in the long-term or fundamental drivers.”  The more one thinks about what he is saying, the more it makes sense.

A spokesman for Marex Spectron described the last two days saying, “We have seen massive liquidation from all quarters.  This is a market that has got only one thing on its mind – Get me out!”  Frank Cholly, Jr., a senior commodities broker in Chicago commented that “If we see this kind of liquidation again, the equity market will follow.  Then we will have a real problem.”

I laugh at commercials here on the left side of the pond in which B-List celebrities hawk buying gold as the one commodity that will never lose its value.  I’ll bet there are a bunch of ill-informed folks who believe that because someone lives in Hollywood they are sharing some expert, inside advice.  No, they’re doing the commercials because they are actors!

The massive sell-off is an indicator of the effect that fear has on the markets.  Investors are afraid that the world financial house of cards is about to collapse.  The problem is that fear breeds fear.  Cooler heads must prevail.  This too shall pass.  Things will either get better or they will get worse, or, perhaps, they might remain the same.  This is not the time for investors to panic.  Somebody, somewhere is going to take it in the shorts.  It’s probably not going to be you. Unless you panic.

I cannot close this article without a favorite story about gold and people’s passion for it.  It seems that a very wealthy man was on his death bed when an angel visited his room to suggest that he finish his earthly affairs and to remind him that he would be leaving everything behind.  The fella asked the angel to make an exception.  After a bit of negotiating, the angel agreed to let the man bring whatever he could pack into one suitcase.  Not too many days later, the guy showed up at the Pearly Gates and was greeted by St. Peter, who promptly told him that he could not bring anything with him.  The man explained that the angel had promised he could bring whatever he could pack into one suitcase.  St. Peter checked the records.  Sure enough, the promise had been made.  He asked the newcomer if he could would show him what he brought with him.  The old man opened his suitcase to reveal bright and shiny gold bars.  St. Peter stared at him with a puzzled look and asked, “Why in the world would you bring pavement?”

Be wise.  Be careful.  Don’t panic.  It’s only pavement.

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