When the price of gold (NYSEARCA:GLD) held above $1,880 per ounce in 2011, it appeared the precious metal’s future as a safe bet was secure. However, news that Cyprus might be dropping much of its gold reserves to finance its bailout put a chink in the metal’s armor. Prices fell 5 percent on Friday, pushing its value below $1,500 an ounce for the first time in three years.
Many analysts are wondering if gold stocks will remain viable in the coming period. Bad days like the frenzied selling on Friday are typically followed by even further rush away from the metal, though a weekend of reflection could alter that trend. In the 1980s, the price of gold fell 46 percent before leveling off.
The sell-off in European markets followed news that Cyprus won’t be getting any more money from the EU, despite the need for another 6 billion euros to pay for the country’s bailout. The connection to gold comes from bailout terms that could require Cyprus to sell off its metal reserves. It needs around 400 million euros…
Though that type of sale shouldn’t have a tremendous impact on the market, other factors are contributing to the loss of confidence in gold. Among them, hedge funds’ shift away from the precious metal signals an industry trend toward equities and away from metals. Gold tends to perform well in periods of negligible inflation and low interest rates like those we are experiencing at the moment. Other economic news wouldn’t have suggested such a poor showing from gold — certainly not the precipitous $78 one-day drop.
That points the finger back to Cyprus. After pretending the bailout could not alter U.S. markets, investors might be seeing the side effects of one of the darkest periods in EU history. Every story surrounding Cyprus offers another reason for pessimism about the island’s finances and the health of the European economy as a whole. Austerity measures in Portugal and Ireland are not helping their struggling economies recover, while Cyprus’s could get worse before it gets a little better. Monday’s return to trading should determine the short-term fate of gold stocks and how investors should respond.