Today's $100 drop (or 8.00% decline) in the price of Gold officially places it in bear market territory as gold funds and ETFs are taking a big hit. But why is Gold falling now? How far will it fall? Is it a good time to buy now?
The Risk of Market Timing With Gold
Three weeks ago, I cautioned my readers about the risk of buying gold now. Without giving an ounce of thought to any technical or fundamental reasons to buy or sell gold in the past year or so, even a beginning investor could have intuitively guessed that seeing record highs for the price of gold is a caution against jumping into the buying trend.
I humbly admit that I was a bit early in my March 2011 caution to readers with the post, 3 Reasons Not to Buy Gold Now. At the time, it was trendy to have "gold parties," where people bring their old jewelry they never wear to a party and sell it for hundreds of dollars. My wife and I actually sold some gold jewelry in the summer of 2011 and made a quick $500. In hindsight, I'm happy with the price and the timing, even though the price of gold climbed another 10 to 20% higher after we sold our gold.
As an investment advisor, I rarely recommend buying gold mutual funds or ETFs. However, they can be good diversification tools when they represent around 5% to 10% of the total portfolio allocation.
Why Is Gold Declining In Price Now?
As usual, rapid and short-term declines have more to do with psychology than market or economic reasons. Gold is likely falling for a combination of reasons. For example, Goldman Sachs announced last week that it forecasts the average price of gold in 2013 to be $1,545. Gold fell below this price Friday, which probably spooked technical traders. There is also fear that the big banks in Europe will sell their stockpiles of gold to generate cash, which would then help support their fragile financial positions.
From a psychological standpoint, the heavy selling of gold on Friday and Monday begets more fear-based selling. Some traders may perceive this as a good time to buy gold, assuming they are correct that these declines in price for gold are not justified and thus a rise in the price of gold may be just around the corner.
Certainly, many investors and traders have enjoyed significant gains in their respective portfolios by investing in gold in recent years. However, rapid gains are not "normal" and the average investor is wise to stick with the boring but dependable tactics of diversification and balanced asset allocation. In general, the collective thoughts and news within this post is why I did not add gold or precious metals to my 2013 portfolio of mutual funds.