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Gold Bubble Finds Its Pin

Gold entered technical bear-market territory after Friday's drop, and its 9.12% plunge intraday Monday is the biggest one-day drop for the precious metal in 33 years, since March 28, 1980, when it plunged 9.94%.

If gold drops more than 9.94% it would be the biggest drop since COMEX gold futures began trading in December 1974. Gold has been in a parabolic move for years now, a bubble in search of a pin, as one analyst has noted.

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What gives? Wasn’t the storyline about central bank currency printing the driver to gold soaring ever higher? That a government need never default on its debt in the currency it prints, that the way to get fake growth is to debase currency, like changing the number of ounces in a pound?  That gold is as stable as cash, that the eurozone would have to print its way out of its crisis, as is the Federal Reserve?

There’s a more rounded story not being told here. Gold is only as good as its last trade, it’s only fundamental is a rising demand versus short supply story.

The gold safety trade has let investors down, too, because housing is recovering, and housing and real estate are also inflation hedges, with more gains to be had, as can equities be more productive.

That's hard to take for the gold investors who have piled into gold -- with a ballooning number of exchange traded and mutual funds making it easier to buy. But just as all those new funds have made it easier to buy gold, so too have they made it just as easy to sell.

Goldman Sachs has already warned that the gold retreat is picking up steam, as it has cut its 12-month gold forecast to $1,390 from $1,550.

Meanwhile, the president of the European Central Bank has already told Cyprus that, if it makes a profit off of its half a billion dollar or so sale of its excess gold reserves, Cyprus must use those profits to repay its bailout loans. That trend could easily take hold in other battered countries, meaning, Spain, Italy, or Slovenia might be pressured to use their gold proceeds to repay their bailouts.

The U.S. does have the largest gold reserves in the world at 8,133.5 tons, 261 million ounces valued at $365 billion according to the World Gold Council and the CME Group. Germany is a distant second with 3,395.5 tons and the IMF is in third place at 2,814 tons.

But think about this. The Federal Reserve’s bailout of AIG was about $187 billion in emergency loans and investments. That’s about twice the size of the U.S.’s gold reserves. That $365 billion is also a drop in the bucket versus the $16 trillion U.S. federal deficit.

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