Gold: The End of an Era

Stocks in Japan and Hong Kong suffered sharp losses today, and major European markets are also in the red. U.S. stocks look to be following their lead this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.8% and 0.64%, respectively, at 10:05 a.m. EDT.

Gold is losing its luster
On the back of a challenging week during which it lost $60 per ounce, gold is reeling on Monday, down more 5%, having dipped below $1,400 intraday for the first time since March 2011. Gold is a highly volatile asset, and recent downward momentum could be nothing more than a spate of volatility in a long-term secular uptrend. Still, I think Societe Generale's research note of April 2, titled "The End of a Gold Era," looks increasingly prescient. The report included an end-of-year price target of $1,375, and that figure is now in sight. Ten days later, Goldman Sachs piled on with a year-end forecast of $1,450.

Bear in mind that the yellow metal was trading just below $1,600 at the publication of both reports. As the following chart for the SPDR Gold Shares ETF (NYSEMKT: GLD  ) shows, gold has dramatically underperformed stocks so far this year:

GLD Chart

GLD data by YCharts.

One of the reasons the metal is so volatile is that, relative to traditional asset markets (stocks and bonds), the gold market is a minnow, particularly when one considers the size of the "free float" -- the amount that is actually available for trading. This quality amplified bull-market moves when sentiment was on its side; if a bear market is underway, it will do the same on the downside. And there's plenty of potential downside left: Gold would need to decline by nearly half to achieve its inflation-adjusted average price since the price of gold floated in Aug. 1971.

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