The price of gold, and the broader commodities market, plummeted on Monday morning. At one point SPDR Gold Trust (ETF) (NYSEARCA:GLD), was down over 8%, hitting fresh 52-week lows at $130. Miners like Barrick Gold Corporation (USA) (NYSE:ABX) and Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) fared even worse, with Barrick’s shares plunging over 12%. The sudden “flash crash,” and broader gold decline in recent months, has left investors searching for answers.
The financial media has been more than happy to offer an answer, or a hundred.
They actually know the real reason, they just don’t want you to. Or perhaps they just don’t want to say it aloud. Before I elaborate, let’s examine causes for golds decline, according to the financial media.
Pundit’s reason #1: China
It was all too easy to link Mondays poor economic data out of China to gold’s decline, as GDP grew at 7.7% instead of 8%. China’s slowing economy isn’t good news for commodities as a whole, but it has no real bearing on goal. You probably heard this headline a bunch, but it’s bunk and the reasoning is coming up in pundit reason #2.
Pundit’s reason #2: Gold has limited practical use
So how in the world could a China slowdown do anything but benefit gold? That kills reason #1, so what of #2?
The argument that gold has no use (aside from being desirable) has long been an argument. This is not news, nor noteworthy, this didn’t become a fact recently. The only problem with this argument is that gold has been a safe haven in the face of things like inflation and political instability since the dark ages.
Finally, there are plenty of financial instruments and investments in the capital markets that don’t have practical use.
Example: cash
Look no further than cash — aside from being used for campfires, you’d say it has implied value wouldn’t you? So why punish gold — because it’s a metal?
Pundit’s reason #3: Inflation is falling
Various media outlets reported this headline as a reason, which actually makes sense, because gold is a natural hedge against inflation. But this view is beyond short term.
The Fed has vowed to continue quantitative easing until unemployment drops below 6.5%. This means for the foreseeable future, Bernanke and company will be flooding the markets with artificial capital. This rampant bond buying will cause inflation, the Fed doesn’t deny this, it’s just a question of how bad it will be.
Artificial market growth via the Fed, and likely interest rate increases are nearly certain to cause rampant inflation, long-term. Commodities are declining right now, but not on strong fundamental merits.
Finally: What “they” don’t want you to know.
What “they” don’t what you to know, is that “they” don’t know — and that’s the scariest reality of all.
There is no real reason that gold should be declining when we factor in all the reasons it rallied, such as:
1. Quantitative easing leading to artificial market growth and inflation
2. Global money printing and record government debt levels
3. Political uncertainty
Has anything fundamentally changed, aside from the price in gold?
Here’s the frightening truth. If gold doesn’t make sense now, then it never made sense to begin with. Every single catalyst that gold rallied on is still in tact, only on steroids.
It’s time we think for ourselves
I’ve been somewhat bullish on GLD, FCX, and ABX since quantitative easing began. So, I’ve experienced the euphoria (and now) a bit of heartache. Suffering declines is never fun, but I certainly won’t panic now.
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Barrick Gold Corporation (USA) (NYSE:ABX) are each expected to earn around $4 per share this year, if they meet expectations today’s prices will seem like a value. But that will only happen if gold prices stabilize, especially for Barrick.
I think the aforementioned catalysts are in tact, gold is not “useless.” If you share my belief, a small position soon could make sense, I prefer the miners (over GLD) because they’ve fallen further.
That also means they’re riskier. This decline, if nothing else, illustrates how volatile speculative assets like gold can be. So in addition to starting small, if you’d like to buy, please consider buying call options that don’t expire for a while. You’ll limit your downside risk for a small price, and when gold stabilizes you could still make a clean double.
Exploit the panic
The extreme pull-back in gold, and Chinese data has also created a pull-back in the greater commodity market — including oil. If you’re looking for a way to play the commodity slump, outside of gold, I recommend National-Oilwell Varco, Inc. (NYSE:NOV). The company is trading just off of its 52-week low, due largely to lower oil prices and especially margin concerns. But NOV is betting that those near-term pressures will lead to a long-term monopoly.
Recent acquisitions and expansion into new product lines has led to lower-margin business but market share gains are afoot, as NOV becomes a “one-stop shop.”
This company, which makes drilling equipment for the oil industry, has over 60% market share. With the recent acquisitions, this number will only increase. Eventually NOV will be able to increase its prices and widen margins, as customers will have no viable alternative. For growth and value, I love National Oilwell Varco here.
Commodities: the anti-stock market
Gold, copper, oil: they’re all the things Mr. Market doesn’t like right now. To be sure, there are risks in commodities but definitely not more than in the broader stock market (at record, inflated levels). The world needs copper and oil as it grows to 9 billion people, and I don’t believe that society (after hundreds of years) is magically ready to give up gold as a safe haven.
The stock market is on a tear while gold, oil, and broader commodities are slumping — is a correction overdue?
The article Gold Drops! What ‘They’ Don’t Want You to Know originally appeared on Fool.com.
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