The much anticipated gold correction hit faster than most expected.
After weeks of eerily consistent gains, gold is now shedding anywhere from $20 to $50 on the down days and struggling to post $10 upticks on short-lived rebounds.
On top of that, the U.S. dollar is showing its first signs of strength in months.
The new trend in gold is down. And as you might expect, the short-sighted "hot money" is finding all the reasons they can to justify selling gold.
But as you'll see in a moment, there's one real reason it's still way too early to be betting against gold.
The Mainstream Goes With the Flow
All the warnings signs were there. Gold just got too hot. A healthy correction was imminent.
As of right now, gold at $1100 an ounce has done just that – corrected. It's down 10%.
Here's the thing though. Since gold prices have fallen, almost everyone is jumping on board to find reasons why gold is going down.
One of the "best" cases against gold came from a recent report from everyone's favorite, nearly-nationalized lender, Citigroup (NYSE:C).
In a recent research report, Citigroup proposes, "There is no obvious relationship between the gold price and inflation."
The firm points to the chart below as evidence:
OK, the chart does show a poor correlation between the ultimate inflation hedge and inflation. Of course, the chart conveniently starts in 1987 and the biggest divergence comes from the credit crunch, when forced selling caused all sorts of market anomolies.
Forget about inflation though. It's only one piece of the gold puzzle.
There's something else at work in the gold market, something most investors will miss, but is crucially important.
The "Real" Reason for Gold's Rise
The main driver for gold prices is real interest rates.
Real interest rates are calculated by taking the nominal rate of interest (what is actually paid) and subtracting inflation.
Right now real interest rates are negative. They're below zero. And the impact of negative real interest rates is always the same, asset bubble.
You see, when real interest rates are below zero, cash and short-term investments lose money. In this environment it's nearly impossible to find decent yields. That's why savings accounts, CDs, and bonds are paying next to nothing.
