The price of gold headed for its biggest one day loss in 18 months. This follow a big selloff on Tuesday. The question: Is the bull market for bullion finally coming to an end?
As financial advisers and market watchers have questioned the upside limits of the price of gold over the past several months, a sudden pullback by the precious metal has introduced a new line of second-guessing.
“We think gold got very, very overbought and we don't think the correction is over,” said Leo Larkin, equity metals analyst at Standard & Poor's Equity Research.
After hitting a record $1,917 per ounce this week, up 16% from earlier this month, gold has plummeted more than 7% over the past two days to around $1,773 per ounce.
Mr. Larkin said S&P's technical analysis has gold pricing in the $1,450 to $1,550 range “in the coming months.”
“Long-term, we're still bullish, but short-term, it has gotten frothy,” he added.
Concerns over the spiking price have led some financial advisers to trim some exposure in client portfolios.
“Over the past few months, we've actually been reducing some positions as we've seen prices go up and up,” said Clinton Struthers, owner of Struthers Financial Services, a $100 million advisory firm.
“I seriously question how much more upside there can be at this point and I do worry about a bubble in that sector.”
Adam Klopfenstein, a senior market strategist at MF Global Holdings Ltd., agrees. “This is liquidation from a crowded trade. In the short run, there's more optimism, and that doesn't bode well for gold. Investors have been using gold more as a fear barometer than a proxy for inflation.”
Some industry participants, however, don't think economics or fundamentals are driving down the price of bullion. “This is just pure panic selling,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC.
Indeed, some advisers are telling clients to embrace the volatility — or avoid gold altogether.
“Gold is in a primary bull market, and if you own it, you need to be able to tolerate the pending 20% to 30% decline,” said Sam Jones, president of All Season Financial Advisors Inc. “But if you don't own it, then one would wait for the same event to potentially buy.”
Mr. Jones, whose firm has $110 million under management, said the average investor is not particularly suited to being a gold bug. “Generally, gold and silver are too volatile for most investors to own in any size for long periods of time and through the natural declines. They would like to think they can handle it, but I know they cannot.”
Volatility is a fact of life when it comes gold, but investors shouldn't read the latest price pullback as a sign that the rally is over, said Nick Barisheff, president and chief executive of Bullion Management Group Inc., a global gold bullion dealer that also has $670 million under management in precious-metals funds.
“To believe gold is in a bubble is to believe there has been a meaningful resolution to deal with the global sovereign-debt issues,” he said. “When investors lose faith in monetary management, there's no place else to go but gold, silver and platinum.”
According to Morningstar Inc., domestic exchange-traded funds investing in precious metals had net inflows of $257 million in July, followed by $314 million in June, $21 million in May and $500 million in April.
Domestic mutual funds investing in precious metals, however, saw net inflows of $130 million in July, followed by three months of net outflows totaling more than $870 million.
Mr. Barisheff believes that individual investors are allocating to gold only superficially at this point and that much of the price rally can be linked to global sovereign-debt issues.
“Gold has been rising equally in all currencies, which means currencies are declining in value rather than gold rising in value,” he said.
Of the estimated $3 trillion worth of “above the ground” mined gold, Mr. Barisheff said half of that is held by the world's various central banks, and most of the remaining $1.5 trillion is held by the world's wealthiest families.
Gold's volatility, he added, can be attributed to the fact it is a thin market relative to the $200 trillion worth of global financial assets, including paper assets such as stocks, bonds and mortgages.
“I would say about 1% of peoples' portfolios are currently held in gold,” he said. “The public is not yet in, so most of this recent decline is just hedge funds and professional traders taking some profits.”
(Bloomberg News contributed reporting to this story)
