Gold Is Crashing... And The Storm Begins
The storm in the US stock market that I have been talking about for the past few weeks may have finally arrived. After weeks of poor economic data, we are starting to see the first crack in the current euphoria in the markets.
Gold has started to come crashing down, which may spread to equity markets here in the US and globally.
Why Gold Is Crashing
The collapse in the price of gold really can't be attributed to one factor only. Multiple events have given investors a reason to sell gold.
Some gold investors are worried that the Fed will start slowing down its monetary policy -- meaning less inflationary fears and more deflationary fears. (Investors have been investing in gold as a hedge against inflation spikes.)
High allocations of gold in some big name hedge fund portfolios may cause a continued, aggressive drop. As prices decline, liquidation of these funds (combined with margin calls) will accelerate the down-trend. In addition, on Monday night the CME started to increase margin requirements on gold -- which will lead to even more margin calls.
While some believe the drop in gold prices is due to a potential slowdown of monetary policy (which in my opinion is not yet at a level to reduce monetary stimulus), others believe it has more to do with the Euro zone -- specifically Cypress.
After last month's Cypress bailout, rumors have been circulating that as part of the bailout deal Cypress would have to sell 400 million Euros worth of gold to raise funds. The fear is that this will lead other countries in financial trouble, such as Italy and Portugal, to start selling their gold holdings as part of future bailout deals. This, of course, would lead to a dramatic increase in supply, thus causing gold prices to drop.
Source: World Gold Council
Impact to US Investors
The big concern here is the gold sell-off spreading into other markets. As gold investors are starting to get margin calls, they will need to sell something in their portfolios to raise cash. Behavioral Finance has taught us that the majority of people like to sell winners and hold onto losers. In this case, equities have been the winners in 2013.
The past two major declines in gold have been followed by declines in equity prices.
source: Bloomberg, Zerohedge
The US equity market is already starting to respond to the drop in gold prices, as equities dropped during Monday's session. But the bigger headline is that the Russell 2000 dropped nearly 4%:
The Russell 2000 index tracks mostly small cap companies which are typically viewed as more "aggressive" investments. A drop in riskier asset groups, combined with an inflow into US Bonds, is an early sign that risk-adverse investors are starting to worry and have begun reallocating from equities into bonds.
Our ARTAIS (Absolute Returns Through Adaptive Investments Strategies) model is still conservatively invested. We removed our gold positions earlier in the year and have been investing in US Treasuries.
We still have a small allocation in US equities, which may be removed if the S&P 500 starts to further break down and volatility continues to rise.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.