In spite its reputation as a safe haven in turbulent times, gold (NYSEARCA:IAU) is now down as much as 10% even in the face of the euro falling off a cliff to the $1.30 level, a level not seen since January.
Traders seem to be shifting away from the mindset of gold’s “safe haven” status to more traditional “the sky is falling” assets like U.S. dollar and U.S. Treasury debt.
The money flow from gold to the U.S. dollar has sent the dollar up a solid 3.3% against the euro thus far for the month of December.
Emerging Money readers have asked how to spot sentiment shifts. In gold’s case, traders can see the shift when gold and the S&P 500 in tandem sold off around the same time the head of the International Monetary Fund expressed a gloom-and-doom outlook — and by the end of the day S&P 500 closed slightly up while the safe haven money went elsewhere.
While analysts point out gold’s decline can be driven by a couple of reasons, such as traders looking to lock in gains before year’s end as gold maintains a nice 11% increase for 2011.
The other key piece to the puzzle is as the U.S. dollar rises, it puts pressure on the gold since gold is priced in U.S. dollar terms.
It is this move to the dollar that traders should watch closely. As USD becomes the best house on the block, it will attract more people seeking shelter from the turmoil.
We are not suggesting gold will only see dark days ahead, but it is important to point out that the gold market is really good at shaking out the speculators — and analysts are saying the speculation in gold is at record highs as both retail and institutional traders look for gold to save their portfolios.
Whether you are a gold bug or simply looking for a safe place to park your money, at times like these, I think back to my mentor hammering into me “never ever fight the trend, go with the trend until it stops.”
The gold trend for now is broken and cash is king.
This not the first time in recent memory that gold has performed a “crazy Ivan” to steal a quote from the movie Hunt for Red October.
In August, gold shot up over 12%, the largest move in two years at the time as traders panicked over the S&P downgrade of the United States’ credit rating.
But bullion only reversed course the following month, even with fear that the global markets would repeat the 2008 U.S. financial crisis.
Traders watched gold lurch down over 11% for the month of September, the largest drop since October 2008 and once again shellacking the speculators while weaker traders ran to the hills.
Thus far, this December is on track for the second-largest drop since October.
With only two weeks left in 2011, traders and institutional traders are looking to lock in profits or use those profits to cover losing positions.
Traders should look to protect long gold positions or consider stepping to the sidelines to look for better entries — perhaps following the money in a position in the U.S. dollar via either the forex market or the stock market via the Power Shares DB US Dollar Index Bullish Fund ETF (NYSEARCA:UUP).
This ETF seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Long U.S. Dollar Futures index. The index is comprised solely of long futures contracts. The futures contract is designed to replicate the performance of being long the U.S. dollar against the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
Traders can even reduce their risk by picking up a CALL option to define the total cost of the trade and reap the upside benefit while only risking the cost of the option to the downside. Consider the March 22 strike CALL options currently trading at $0.75. The option provides traders the right to control 100 shares for the next 91 days and has a 64.97% probability of expiring in the money.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.