This major sell-off in gold and cyclical stocks is the deflationary effect of Europe’s mismanagement of their debt crisis/bailouts. Regardless of what guarantees should be honored and who should pay for bailouts, when you confiscate assets and destroy all confidence in your banking system, everything freezes. People hoard what they have, money stops moving, and the economy slows. I saw these deflationary pressures coming and have been buying Treasuries and most recently the US dollar to hedge it, but a 0.5% gain does not offset a 9% drop in gold very well! I have to admit that I did not expect this… The selling in gold began last week off the announcement that the EU leaders were going to force Cyprus to sell gold reserves to partially fund the bailout and accelerated as the market assumed this would be the case for other nations. Today is the continuation of forced sales from margin calls. It’s a snowball effect and has the potential to continue so I’m not stepping in to buy more just yet.
Fortunately it’s creating some nice opportunities in other areas of the market – just have to wait for the dust to settle at this point. This also illustrates the importance of always having dry powder to take advantage of these opportunities. Never a dull day!
Nick