By Kishori Krishnan Exclusive To Gold Investing News

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We would love to say we told you so…that gold, which was soaring to giddy heights, was all set to slump. It did. On Friday.

Gold price, which has been trading at record levels lately, had its biggest one-day drop in a year Friday. The yellow metal plummetted more than $60, erasing one-seventh of its entire rally for all of 2009 in one single trading day.

On the New York Mercantile Exchange, it closed down $48.80 to $1,169.50 an ounce. Crude oil settled down 99 cents to $75.47 US a barrel.

There was clearly a whiff of mania about the rising gold price, given how extended and overbought we were.

Speculative “hot money” from hedge funds and other investors taking a long position on the gold price also hit record levels in recent weeks, suggesting the commodity’s rapid surge could evaporate just as quickly.

Not to forget: gold’s latest boom also offered the US government an opportunity to capitalize on the emotions of speculators and sell off its own horde of the metal.

Crafty? Now, who is laughing all the way to the bank?

Stock talk

Meanwhile, on the Toronto Stock Exchange, gold stocks were among the biggest contributors to the benchmark index’s loss on Friday.

Remember, the international gold pile-on had spurred the S&P TSX Global Gold index up 21 per cent in a month.

Barrick Gold Corp, (TSE:ABX) the world’s biggest gold producer, was faced with not only plunging bullion prices, but a US court judgement asking for more analysis of a proposed mine expansion in Nevada.

Iamgold dropped $1.04, or 5.1 per cent, to $19.24.

Goldcorp, the second-largest gold miner, fell $2.82, or 5.9 per cent, to $44.66. The company has also agreed to its subsidiary company’s sale of minority interest in the Morelos project for C$52 million.

All hype

Clearly, the market was too heated up.

Bull markets in gold come about because the value of the money we use day-to-day continues to fall, given that dollars are being created at a rapid rate. That remains the primary driving force in the gold market.

There really hasn’t been a good reason for the greenback to rally in recent days, with little substantial economic information to support its upward trend.

Point to be noted though – amongst other commodities, gold has shone the brightest over the past decade. It traded at $288 an ounce 10 years ago, Barclays Capital said. Last week, the spot price jumped to an all-time high of $1,217 – giving a stellar 323 per cent return, or about 15 per cent a year.

Oil too has fared well, breaking through $100 a barrel for the first time in January 2008. It has returned 214 per cent in nominal terms over the past 10 years.

But that does not mean it is THE investment?

Gold is more or less useless, it is hard to see why it has any value beyond the fact that it earns because it looks pretty.

Unlike platinum, which is used in pollution-reducing catalytic converters, there are no big industrial uses for gold.

And if you are with John Maynard Keynes, gold is “outmoded”, because it simply makes no sense to tie the economic capacity of human endeavour to the amount of gold you can dig out of the Earth’s crust.

Several analysts also maintain that gold is in demand because investors dislike the alternatives out there, rather than because it has any intrinsic attractions itself.

An asset such as gold, which pays no income, is bereft of the most important of investment mainstays.

Why then go for it, one might ask?

Expert speak

Let some experts do the talking.

“We believe that gold will have to shift into the slow lane,” says Wolfgang Wrzesniok-Rossbach at German refining group Heraeus in his latest Precious Metals Monthly.

“A rally like this one cannot continue forever,” agrees Mitsui in its latest note, but “with the momentum the yellow metal has been carrying, it is risky business to stand in its way.”

Sheryl Purdy, vice-president at Leede Financial Markets Inc in Calgary, is asking her clients to resist buying gold. “For me, this is a strong sell signal. For the clients I have holding gold positions, I’ve already advised them to lock in [profits]. I’m not buying at this point,” she said.

“Gold is being remonetized these days and is behaving now a little more like a currency, rather than an industrial metal… and of course central banks, after being small net sellers in the first half of this year, have probably turned into net buyers,” said Patricia Mohr, vice-president for economics and a commodity market specialist at Scotiabank.

Probable causes

Two major events could also have contributed to gold’s downfall. Barrick used $5.1-billion raised in stock and bond sales to shut down its hedge book well ahead of schedule. The move could have taken a substantial amount of gold off the market.

Also, Chinese Central Bank vice Governor Hu Xiaolian said, not in so many words, that there is a bubble developing and that China is probably not going to purchase IMF gold.

That was enough. The panic button was hit.

Of course, this does not mean that the Asian nation will cease quietly buying gold from its own gold mines and perhaps intervene in the markets on the price dips. But it is likely to happen.

Though the economies of countries like China are in danger of overheating, the economic downturn is not over yet in the West.

Some nations – and even US states – remain in a precarious financial position close to bankruptcy, which may require way more bailouts.

Some of the smaller ones may even go to the wall.

If you, dear investor, have come to a dead-end, remember the adage: “buy on the sound of bullets.”

Heard any firing lately?

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