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'Armageddon' Trade Is Off as Gold Price Tumbles

Monday, 15 Apr 2013 | 2:25 PM ET
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Though the near-term ride could get bumpy, history suggests the recent sharp selloff in gold is unlikely to have a pronounced impact across other markets.

In stocks, specifically, similar events actually have preceded longer-term moves higher.

And across other markets, more fundamental factors other than a drop in the financial markets' most controversial safe haven play likely will take hold, most experts agree.

(Read More: Gold Hit by Panic Selling, Dragging Other Metals)

"Precious metals are coming off the same reason the stock market is going up—because confidence is improving," said Jim Paulsen, chief market strategist at Wells Capital Management. "You see that armageddon premium in gold and silver coming out."

Indeed, gold saw what some considered a historic tumble, giving up 9 percent and suffering its worst two-day decline in 33 years. Silver plunged nearly 11 percent. Copper, often considered an economic bellwether, dropped nearly 4 percent at one point before cutting those losses in half.

The moves occurred without other triggers often associated with safe-haven demand.

For instance, the U.S. dollar changed little against global currencies, and Treasury yields also were mostly unmoved.

But equity markets plunged with the Standard & Poor's 500 giving up 1.2 percent.

That, however, was somewhat in keeping with previous sharp gold moves lower.

(Read More: Gartman on Gold: We've Never Seen Anything Like It)

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This marked the first time since the Asian currency crisis in 1997 and the 11th time since 1975 that gold has traded this far from its 50-day moving average.

During the previous occasions, the average returns for the market were relatively flat over the next week but then 3.7 percent higher over the next three months and 7 percent higher after six months, according to Bespoke Investment Group.

"This is gold-specific. It has nothing to do with everything else that's taking place," said Todd Schoenberger, managing director at LandColt Capital. "I don't think any of us are too terribly surprised, especially with what we've seen with gold over the past couple of years. It was the sexy topic to talk about. Now it's a nuisance to hold."

Gold has been a popular holding among those worried that central bank money creation would drown the global markets in liquidity and feed inflation.

But with the world's economy only meandering along, inflation worries likely are headed for the back burner.

In the meantime, some debt-laden European countries—Cyprus in particular—may have to sell gold holdings to meet their obligations.

Combine that with tripping of technical levels and the continued move to U.S. equities and high risk in general, and it appears the gold march to record highs will have to wait.

(Read More: Cramer: This 'Tipping Point' Is Great for Stocks)

"Gold's new suitors never understood the fundamental case for gold and now they are turning their affection back to their true love: U.S. equities," Peter Schiff, founder of Euro Pacific Capital, wrote in an analysis.

Schiff has been one of gold's most vocal supporters and holds that it will regain its luster.

"While nations buying gold will pay for their purchases with dollars, the sellers will not re-invest the proceeds into Treasurys," he said. "Dollars raised through gold sales will be converted to local currency and used to repay debt.

"This will put downward pressure on both the U.S. dollar and Treasurys. In addition, emerging market central bankers will be more likely to hold onto gold for the long term, thereby providing a bullish impact on the market. In essence, such a shift would flush out the weak hands who don't have the resources to protect their wealth in favor of stronger hands that do."

For the moment, at least, that bet comes with a high degree of risk considering momentum.

"If this gets anywhere near $1,400 on the bounce, I guarantee you're going to see more shorts coming in here," said Michael Gurka, managing director at Spectrum Asset Management in Chicago. "Buying the dips is the risk, but selling into the bounce is more for the long-term trade. Now it's going to be decision time."

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