\n\tBy Alexander Green, Investment U Chief Investment Strategist<\/p>\n
\n\tNo one likes to hear an investment analyst say, “I told you so.”<\/p>\n
\n\tIt’s unseemly. And it grates.<\/p>\n
\n\tAfter all, we know market pundits can look back on the good calls and conveniently forget about the bad ones. On top of this selective memory, a good call doesn’t necessarily show any particularly acumen. Maybe a stock or a currency or a commodity went up or down as predicted but not for the reasons the analyst foresaw.<\/p>\n
\n\tHowever, gold has hit the skids – it recently broke through a 2 1\/2-year low – and for exactly<\/em> the reasons I’ve been warning about for months.<\/p>\n \n\tIf you have a big position in gold… it’s time to cup your groin.<\/p>\n \n\tAs I’ve said many times before, whether gold is overvalued or undervalued is difficult to ascertain under any circumstances.<\/p>\n \n\tGold accrues no interest, pays no dividends, generates no earnings and provides no rental income. So you can forget about P\/E ratios, book value, discounted cash flow or yield to maturity.<\/p>\n \n\tIt is a speculative asset. Period.<\/p>\n \n\tAn Unreasonable Trend<\/strong><\/p>\n \n\tWhy then did I keep harping on its coming collapse? For three reasons, including one big one. <\/span><\/p>\n \n\tThe first is that gold surged during the financial crisis as faith in paper assets ebbed. It was entirely reasonable. <\/span><\/p>\n \n\tWhat was unreasonable, though, was that gold kept rising – and stayed high – even as the crisis abated and the economy and financial markets gained traction. <\/span><\/p>\n \n\tThe second reason gold rallied was fear of higher inflation.<\/p>\n \n\tAgain, it made sense. Gold is a traditional inflation hedge and investors were scared that Congress (with its easy spending ways) and the Federal Reserve (headed by Helicopter Ben and his open spigot) would inflate us out of the crisis. <\/span><\/p>\n \n\tBut Uncle Sam’s debt as a percentage of GDP will decline over the next two years. The Fed is weighing when to end the monetary stimulus. The dollar is strengthening. And inflation is MIA.<\/p>\n \n\tHot Hands<\/strong><\/p>\n \n\tHowever, the biggest reason I forecast a decline in gold prices was that the metal had fallen into the hands of the “hot money.” By that I mean traders and hedge fund managers who have no interest in holding anything that is not moving in the right direction.<\/p>\n \n\tBear in mind that until 2005 only 15% of all gold was purchased by investors each year. (The vast majority – about 78% – was consumed in jewelry.) But by 2009, more than 40% of gold was being bought by investors.<\/p>\n \n\tIn particular, gold was under heavy accumulation by a number of big hedge funds. These folks are very different from mom-and-pop investors who think of the yellow metal as their “forever investment.”<\/p>\n \n\tThese are gunslingers with no interest in fighting a major trend. And – trust me – a 2 1\/2-year low is a major trend. <\/span><\/p>\n \n\tI’ve heard some investors insist the drop in gold is some kind of government conspiracy to restore confidence in the financial markets.<\/p>\n \n\tPleeease.<\/p>\n \n\tMore than 300 metric tons of gold have flowed out of gold ETFs in the last few months. George Soros, for example, dumped his entire position in SPDR Gold Shares<\/strong> (NYSE: GLD).<\/p>\n \n\tAs I write, gold is down 19% year-to-date. And the World Gold Council recently announced that overall demand for gold was down 13% in the first quarter alone.<\/p>\n \n\tI’ll be the first to admit that gold could suddenly rally. After all, it is protection not just against inflation but against all sorts of unforeseen political and economic calamities. That’s exactly why you should own both bullion and blue chip gold shares as long-term financial insurance.<\/p>\n \n\tBut understand that the short-term money is now bailing out of gold with both hands. That means the near-term direction is pretty clear…<\/p>\n \n\t… look out below.<\/p>\n \n\tGood investing,<\/p>\n \n\tAlex<\/p>\n \n\t \n\tNothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.<\/em><\/p>\n \n\tViews expressed are not FNArena's (see our disclaimer).<\/p>\n
\n\tReprinted with permission of the publisher. The above story can be read on the website www.investmentU.com. The direct link is: <\/em>http:\/\/www.investmentu.com\/2013\/May\/why-gold-will-drop-from-here.html<\/a><\/p>\n