A month ago, in an article published in this blog, I warned about gold being expensive. Despite this, I never thought that the fall would be so violent. I never imagined gold would fall 15% in three sessions to a two-year low of $1,321 in the Asian market on Tuesday. That said, now two questions must be answered:
(1) Why was the fall so sharp? and (2) If you still hold gold in your portfolio through the gold ETF, SPDR Gold Trust (ETF) (NYSEARCA:GLD), what should you do?
According to Goldman Sachs analysts, “The sharp sell-off in gold was triggered by growing fears that the central bank of Cyprus would sell its gold reserves, potentially reflecting a larger monetization of gold reserves across other European central banks.” I believe this theory has some degree of reality but, beyond this short term fact, the truth is that gold was expensive. The world has come back to (slow) growth and gold owes most of its value to its safe-heaven characteristic. Besides, at some point, quantitative easing is going to expire and assets that yield zero cash will not be as valuable as they are now. So I think that Cyprus’ story is a good way to explain the yellow metal’s
There are many ways for you to hold gold in your portfolio. Perhaps the most popular one is being long GLD, but you might be holding gold through producers such as Barrick Gold Corporation (USA) (NYSE:ABX) or Goldcorp Inc. (USA) (NYSE:GG).
Gold producers are a different story. You should not only take into account the price of the commodity they sell but also their current valuation in a scenario where gold prices might be lower. I mentioned Barrick Gold Corporation (USA) (NYSE:ABX) and Goldcorp Inc. (USA) (NYSE:GG) because they are both good companies representing the commodity but, while one of them is a sell, the other is not.
