Gold: Should You Buy Into This Panic Selloff?

| April 15, 2013 | 0 Comments

goldWhat’s occurring in the gold market right now is simply amazing… 

It’s not often you see a commodity endure full-blown panic selling.  On Friday, gold plunged a staggering $80 an ounce.  The market was awash with selling as the yellow metal broke below an important technical support area.

Take a look…


As you can see, sellers abruptly took gold below the vitally important technical support area of $1,550 on Friday.

And the selling didn’t stop there… 

On Monday morning, investors find the yellow metal down another $125.  That’s a $205 nosedive within two trading sessions!  Gold can currently be had for $1,374 an ounce… 14% lower than the $1,600 you could buy it for on April 2nd.

That’s a steep drop- what’s going on?

It’s painfully simple- investors want out at any cost.

At the moment, metal investors are simply throwing in the towel.  They’re ignoring the notion that gold is a solid inflation hedge.  They’re also disregarding the idea that the yellow metal is seen as “safe” in times of economic uncertainty.

Why the sudden shift in sentiment?

Gold’s meltdown started last week when investors found out Cyprus may be forced by the European Union (EU) and International Monetary Fund (IMF) to sell its gold in exchange for bailout funds.

The importance of this can’t be understated…

If the EU and IMF can force Cyprus to sell its gold, there’s no reason they can’t require other heavily indebted nations to do the same.  That means the gold holdings of Italy, Portugal, and Spain may be subject to selling at some point. 

In case you’re unaware, that’s a huge amount of the yellow metal that could theoretically be sold into the open market.  Italy alone holds just over 2,400 metric tons… or $116.4 billion worth of gold.

Now let me be clear…

Cyprus bank officials are denying the allegations that they’ll sell gold in exchange for bailout funds.  They say it’s nothing but vicious rumors. 

So the fundamental underpinnings for gold’s recent selloff may not even exist.

But unfortunately for gold bulls, the damage has already been done.  

The severity of Friday’s selloff started an avalanche of selling that will take time to stop.  You see, once the bottom fell out of the market, many heavily gold long investors were likely met with margin calls from their brokerages.

In other words, they’re being forced to sell.  And when margin call selling takes hold, there’s no telling where it will stop.

So, should you buy into this gold selloff?

If you’re an aggressive investor, it’s likely tempting to take a shot at buying gold at these levels.  After all, gold’s a lot cheaper than where it was just a few weeks ago. 

However, I don’t recommend it…

The long-term bullish uptrend for gold has been solidly broken over the past two days.  That and the fact that margin selling has overtaken the market makes being long the yellow metal a very risky proposition.

 I’ll go into gold’s long-term technical picture, and what it means for future prices, in my next article due out on Wednesday. 

Be sure to tune in!

Until Next Time,

Justin Bennett

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Category: Gold

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.