Gold bars are displayed at Shinhan Bank in Seoul.
(Photo: Jung Yeon-Je, AFP/Getty Images)
(USA TODAY) -- The price of gold sank to its lowest level in nearly three years Wednesday, in a massive meltdown of the precious metals market.
Gold is suffering as investors continue to weigh comments during the past week from Federal Reserve Chairman Ben Bernanke indicating the central bank's massive stimulus might be winding down. If that's true, it spoils much of the investment thesis of gold being a safe haven because now rampant inflation appears less likely and the economy is more stable.
Gold "was a bubble," says Ken Winans of Winans International. "This is the unwinding of a bubble."
The price of gold Wednesday fell 3.5% to $1,229.60 an ounce, the lowest level since Aug. 24, 2010, says Bloomberg News. Gold is down nearly 23% this quarter, positioning the metal for its largest quarterly loss since 1920. Meanwhile, the price of silver is at its lowest since August 2010. Wednesday, silver fell 5.5% to $18.57 an ounce.
The gold and silver crash is leading investors to consider that:
• Bearish forecasts that powered gold higher aren't coming true. Gold buyers figured inflation and a weak dollar where a given, and that gold was the perfect safe haven from both, says Jeffrey Sherman of DoubleLine Capital. But with the dollar soaring and rates rising, following the Fed's hints, both of those drivers for gold are gone, he says. "People are rethinking if they really want to own the asset," he says.
The doomsday scenarios gold enthusiasts predicted haven't materialized. "Many people out there were scared to death and loaded up with gold on the idea we will all be eating deer meat in the mountains," Winans says. "But they paid the ultimate price."
• The downward trend of gold is feeding on itself. Commodity traders tend to pay close attention to trading trends, and the direction is down, says Michael Peterson of McNicoll Lewis & Vlak. Meanwhile, there's little data to indicate consumer demand for gold will offer any kind of floor. "We haven't seen the inflection point in this downward trend," he says.
• New commodity products attracted inexperienced investors, who are selling now. The creation of gold and silver exchange traded funds, which made it as easy to buy gold as it is to buy shares of General Electric, invited a new group of naive traders into commodities, Winans says. These tools put commodities in easy reach of investors who had no experience with them and who are panicking now, he says.
The question is, how low can gold go? The massive selloff of precious metals has pushed gold down roughly 40% from its high of more than $1,921 an ounce in September 2011, Winans says.
The last time gold crashed following a bubble was in 1980 and 1982. During that time, gold wound up losing 65% of its value, he says. "You're in a structural bear market for this stuff," he says.