Gold Plunges 7% in Two Days - Has the Bubble Burst?

Financial advisers and market watchers have been warning for months that the run-up in gold prices was a bubble.  And today the bubble is showing signs of leaking.

Gold hit a record high of $1,917 per ounce earlier this week, a 16% gain.  In an economy where almost nothing is doing much of anything, that's almost too good to be true.

And you know what they say about things that are too good to be true. 

Well, today, gold was at $1,773 per ounce last time we checked, down 7% in just two days.  Market watchers are looking for it to sink to $1,450 to $1,550 or so over the next few months, or maybe sooner.

Panic or profit-taking

So is it panic selling or is the smart money cashing in its chips and walking away from the table?  You get different answers from different analysts.

It doesn't really matter, since the net effect is the same: those who thought they could make money in a dismal bear market are finding out that they may just be on the end of the ship that is currently sticking out of the water but is soon to follow the bow in a dive to the bottom.

Or as Leo Larkin, equity metals analyst at Standard & Poor’s Equity Research, “We think gold got very, very overbought and we don’t think the correction is over,” according to Investment News.  “Long-term, we’re still bullish, but short-term, it has gotten frothy.”

Concerns over that frothiness has led many financial advisers to counsel to trim their exposure to gold, cutting future risk and taking a bit of sorely-needed profit in the meantime.  

Strong heart

Advisers have always warned that gold is not for the faint-of-heart. To do well long-term in gold, investors have to be willing to put up with 20% to 30% spikes and dips.  More importantly, they have to put emotion aside and be ready to jump ship when she starts to list. 

“Generally, gold and silver are too volatile for most investors to own in any size for long periods of time and through the natural declines. They would like to think they can handle it, but I know they cannot,” said Sam Jones, president of All Season Financial Advisors Inc., speaking with Investment News.

On the other hand -- there's always another hand, isn't there -- if you've been dying to buy gold but fearful of buying too close to the top, it may soon be time to jump on board. But keep that life preserver handy.