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Why Gold Is Crashing

Stocks in this article: GLD DGL UGL NUGT GDX GDXJ

This idea betrays a deep ignorance of how the gold market actually works. But I will not belabor the technical details here. The point I want to focus on is that hard-core gold bugs have completely misunderstood the role of "paper" gold. Far from being something they should have been attacking, they should have realized that paper gold was the number one cause of the gold bubble that developed over the past few years. Without paper gold, the yellow metal simply does not have sufficient appeal as a physical commodity.

Paper gold is the paper goose that has been laying the golden eggs!


The current crash in gold is going to make very clear something that many of us have understood for a long time: The type of investors that buy gold ETFs have absolutely no interest in holding physical gold, and they never will.

In general, the hedge funds and individual investors that rushed into gold ETFs and drove the massive rise in gold prices were and are there for speculative gains.

They have no interest in the physical metal itself. As the gold price turns on them, they will treat gold like the plague dumping it as impulsively as they bought it.

In a word, my contention is that paper gold holders are "weak hands." We are about to test that hypothesis in a big way.

In my view, gold will go down to about $1,300 at least, or another 10% or so from current levels, before finding any solid support from "strong-handed" "non-paper" buyers. However, more downside for the yellow metal is entirely possible as a retracement of the movement driven by paper gold mania would imply gold prices well below $1,000.

Furthermore, it would take a decline to well below $1,000 per ounce before the gold price became aligned with its historical average relative to most other assets.

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