Dec 15, 2011

Gold Appears to have Lost its Shine

For the past 10 years Gold prices have only gone up. Many have been quick to call it a bubble, only to be proven wrong time and again, but it looks like they will finally get some redemption. For many years only professional investors cared about the price of Gold. That slowly changed and in the beginning of 2011 the mainstream news was extolling its value as a hedge against inflation, deflation, credit risk, dollar debasement and just about anything else. As Gold prices had already gone up "too much" the popular interest drove a mini-bubble in Silver, with "poor man's Gold" almost doubling between the end of Jan and end of Apr 2011.

Then the 1st Silver Shock occurred on May 2nd, driven by the CME significantly hiking margin requirements. It dropped about 33% in a few hectic sessions, but the impact on Gold was limited (-6%). Gold closed on May 9th at 1470 and in fact kept rallying to an all-time high of 1920. This level was reached in late August (and tested again in early Sep) in the aftermath of the global sell-off triggered by the S&P downgrade of the US credit rating. So far so good, but the next time around it was different.

Silver never recovered to the April high and when the 2nd Silver Shock hit on Sept 22nd, it dropped as much as 35% in 3 days. This took Gold down from 1780 to 1530 (intraday low) for a drop of 15% and while it slowly recovered to the 1800 level Gold had lost its aura of a super-hedge and became an asset like any other. Since then it has been moving in lock-step with the S&P 500. With current price at 1570 I would not go near it unless it drops to the 1000~1200 range.

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