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7 Expert Opinions on Gold's Slide, and What's Next

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From Cyprus and treasuries to the devolution of social mood, Minyanville weighs in on gold's slide downward.

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The price of gold dropped 9% on Monday, after a 5% drop on Friday. Here, a selection of seven writers from the Minyanville community share their insights on what the slump means for the markets and beyond.

Is This a Liquidity Event?
By Michael Sedacca

There are a number of reasons why gold could be selling off, but overall the recent activity is representative of the deflation in the bond market that we've experienced since mid March. One potential catalyst, of the many, is that the Cyprus government is selling its roughly $650 million of gold holdings. One of the main investment theses for gold over the past four years has been that central banks will be large buyers of gold, even though they are flooding the system with reserves (commonly referred to as "printing money"). Now that mentality may be changing, and it's a shock to the system.

Over in the Treasury market, ever since the mid-March time frame, the curve has continued to sharply flatten, which is a deflationary signal. The 5s30s curve has tightened from 239bps to 219bps. Five-year inflation breakevens (or inflation premium between TIPS and nominal bonds) have tightened from 2.42% to 2.095% -- though to be fair TIPS are sensitive to commodity prices. It's likely that precious metals are catching up to this activity.

From the FX perspective, in a sense you can say much of this is due to the rapid fall in the yen, especially vs. the dollar. In a sense, Japan has been exporting their deflation to the US by pushing down the price of the yen. Year-to-date, the dollar index spot is up 3.1% and the trade-weighted dollar has gained 1.3%.

Is this is a liquidity event? It very well could be. Today's volume in the June COMEX gold future stood at 751K contracts by the time the floor session closed, surpassing the prior record of 486K. This is over two times the current open interest of 274K contracts, and almost two times the highest previous volume, which speaks to a capitulation event. It also means that there is a large amount of trading and not purely selling as well.

While I've never been a fan of gold investments, I am seeing capitulation in gold ETFs such as SPDR Gold Trust (NYSEARCA:GLD). Year- to-date, GLD's fund size has shrunk from 448 million shares to 383.6 million shares as of Monday's close. On the other hand, the physically backed gold Physical Swiss Gold Shares ETF (NYSEARCA:SGOL) hasn't seen much movement.

Lastly, I think there is one variable that should be taken into account with gold. For the vast majority, in terms of safe haven demand, gold is an "emotional" hedge, whereas Treasury bonds are an "inflation" or "growth" hedge, so gold typically overshoots in both directions. Further on that, over the past three years, gold has been purchased by speculators as a "central bank hedge" of sorts, often on a misunderstanding of monetary policy. This is evidenced by the liquidation out of GLD in the face of numerous central banks conducting unprecedented monetary policy.

Michael Sedacca is the editor of Minyanville's Buzz & Banter. He comes from Orlando, Florida, and played college golf at the University of North Carolina - Chapel Hill. Read more of his work for Minyanville, here.


Goldfinger Meets the Lady or the Tiger
By Peter Atwater

At the end of 2010, the European debt team at Morgan Stanley (NYSE:MS) offered this thought:

The bonds of several peripheral countries, while still being government bonds in name, no longer offer the advantages of a government bond -- safety, liquidity, low volatility and a negative correlation with risky assets…Hence, investors running a traditional government portfolio are exiting those markets. In short, peripheral government bonds have become an asset class in search of a new investor base.

What brought this quote to mind this morning is the collapse in gold -- and for that matter the collapse in Bitcoin values last week. Both were perceived to offer safety and liquidity in a world of devaluing fiat currencies.

(See also: The Basics on Bitcoin: 11 Things to Know About This Suddenly 'Hot' Digital Currency.)

Today, neither is safe.

As one who has worried about the bursting of the bubble in all things safe for some time, I can not emphasize enough what a critical market juncture we are at today.

From my perspective, one of two things is about to happen:

Either a) investors will extrapolate the collapse of Bitcoin and gold to the notion that nothing is safe, or b) investors will extrapolate the collapse as signaling the end of the bear market and equity values will soar and bond yields will rise as investors celebrate the end of the fear trade.

I wish I could offer a strong view in one direction or the other, but to do so today would be woefully premature.

Like dot-com stocks in 2001, gold is now dead. Like all other post-mania investments, it has not performed as expected and it is an investment in search of a new investor base. The question is what now arises in its place.

What is ahead is the ultimate "risk on" or "risk off" trade. Either everyone or no one believes.

Peter is the President and CEO of Financial Insyghts LLC. He is the author of Moods and Markets: A New Way to Invest in Good Times and in Bad. Read his recent articles, here.


A Disturbance in the Force
By Michael Comeau

I've had no opinion either way on gold, but I will say this: I don't like these types of market dislocations.

Looking back to the end of 2007 before the market meltdown, it felt like things were 'breaking' all over the place -- credit spreads were blowing out, the VIX (INDEXCBOE:VIX) was climbing upward, and the homebuilders and financials were performing horribly. There was definitely something nasty in the air well before Lehman and Bear collapsed.

Incidentally, the safety/inflation insurance play -- gold -- was skyrocketing.

Now, I'm worried that the collapse in gold -- and silver (NYSEARCA:SLV) for that matter -- also qualify as early dislocations of trouble to come in the markets. I certainly don't like the way oil is acting right now!

On the upside, the persistent bid for Treasuries indicates that at least some market participants are braced for a shock -- and possibly some real profitability. If, and this is a big if, we are unknowingly walking into a 2008-2009 style mess, the long Treasuries trade (which I am not in, to be clear), even at these nosebleed levels, may look incredibly prescient.

Michael Comeau edits Minyanville's Buzz & Banter, and is also a regular columnist on Minyanville.com, focusing on technology and consumer stocks. Read his recent articles, here.
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No positions in stocks mentioned.

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