Deflation deflating appeal of bullion; a good time to buy?
Dominick Paoloni had seen enough. As the euro this week flirted with its lowest price versus the dollar since January, Mr. Paoloni, chief investment officer and founder of Investment Protection Solutions, sold off 90% of his clients' gold positions. The firm previously had allocated about 10% of their holdings to gold. “The attitude in Europe is austerity, which is deflationary and could lead to a recession," Mr. Paoloni explained. "Both are bad for gold."
Gold hit a five-month low of less than $1,600 an ounce this week as the euro fell below $1.30 for the first time since January. The precious metal also broke its 200-day moving average, leading Stifel Nicolaus & Co. Inc. to conclude that the price could be heading toward $1,400 an ounce, according to a Bloomberg report.
Another sign of a possible collapse: The $69 billion SPDR Gold Shares ETF, the most popular gold fund, has fallen about 8% in the last five trading days.
“Gold's a funny thing because you can have so many different factors impacting it at once,” said Dan Denbow, portfolio manager of the $2.3 billion USAA Precious Metals and Minerals Fund. The long-term drivers of gold, such as the threat of inflation and unsustainable deficit levels in the U.S and other developed countries, are still in place, Mr. Denbow said, but the strength of the dollar has trumped those factors in the short term. “The dollar's the one outlier that could overcome the fear trade,” he said. The U.S. greenback and gold have a strong negative correlation historically, moving in line only during flights to safety, Mr. Denbow explained.
Economist Dennis Gartman, who writes the influential Gartman Letter, is not particularly optimistic about where gold is heading, either. According to Bloomberg, Mr. Gartman sold the last of his gold holdings Dec. 12. “So much damage has been done to the psychology of the market in the past week, and so many late longs have been caught off guard that we think wholesale liquidation, and perhaps forced liquidation, shall be the outcome,” he wrote.
Then again, the falling price of gold isn't entirely a bad thing. Some advisers who missed out on this year's run-up in bullion now have a chance to get in at an attractive price.
“We pay a lot of attention to the price we're paying for what we're getting,” said Chuck Bender, chief financial officer at The Financial Consulate Inc. Mr. Bender said the firm's investment committee is keeping an eye on gold since it likes it as a hedge against a falling dollar. The price of the precious metal has been too high this year, however, he said.
Brian O'Neill, president of Cahaba Wealth Management Inc., prefers to keep 3% to 5% of his clients' portfolios in gold. But with the bull run on bullion this year —gold is still up 11% year-to-date — he hasn't felt comfortable buying it for new clients. If gold falls another 10% or so, Mr. O'Neill anticipates that he'll start buying again. In the meantime, he's telling clients not to worry about the short-term swings.
Gold prices are expected to stay under pressure as long as the situation in Europe remains unsolved. Will Rhind, managing director of commodity exchange-traded fund provider ETF Securities (U.S.) LLC, expects any resolution to be a boon for gold. Either the eurozone will continue to erode, and fear will overtake the dollar as gold's key driver, or there will be some kind of stimulus that creates inflation, which is another driver of gold, he said.
Mr. Paoloni thinks the latter scenario is most likely, and is watching for signs of it so he can start buying gold again. “If the European Central Bank announces it will start printing euros, it could send gold to the moon,” he said.
