Gold’s Decline Rattles Some Small Investors’ Faith

April 15, 2013, 4:56 p.m. ET

Gold’s Decline Rattles Some Small Investors’ Faith

By MATT DAY

Gold’s two-day swoon has shaken even some of the metal’s most diehard fans.

Throughout gold’s 19-month rough patch, small investors – those who buy gold coins, or own shares in exchange-traded funds that buy the metal – were one group that never lost faith.

Gold coin sellers clogged the airwaves with advertisements making the case that there has never been a better time to buy. Newsletters from self-proclaimed gold-market experts proliferated, as did financial products designed to capitalize on interest in the metal. U.S. Mint gold coin sales hit a record high in January, even though gold prices were down 11% from record highs hit in August 2011.

Some of those buyers say they’re having second thoughts this week. A wave of selling that hit the market Friday morning accelerated when the market reopened Monday. During the two days, gold futures lost 13% of their value, falling $203 to $1,361.10 a troy ounce on the Comex division of the New York Mercantile Exchange. Monday’s $140 drop was the largest in 30 years.“The trade is over,” said Jason Tamayo, a 24-year old Navy veteran who said he bought about $50,000 in gold – about 30 ounces – in October on the view that the metal would continue to march higher amid worries about U.S. debt and the stability of the global economy.

Mr. Tamayo said he sold his gold Friday, at a loss of $7,200.

“Everybody was selling on Friday morning. It just kept dropping and dropping,” Mr. Tamayo said. “It’s just a list of things that I didn’t expect to happen. I thought I would get at least a $100 return on each ounce.”

Gold’s plunge caught many off guard. Though some high-profile market watchers, including analysts with Goldman Sachs GS -1.78% and Societe Generale,GLE.FR -1.14% had predicted earlier this month that gold’s 12-year bull run would come to an end in 2013, few expected it would happen so soon, or so quickly.

“This decline is not only surprising; it’s stunning,” said Brien Lundin, longtime editor of the Gold Newsletter, a $190-a-year subscription service for investors interested in precious metals. “There’s really no way to predict when it’s going to stop.”

Mr. Lundin says his newsletter’s subscriber base, which he said totals 4,000, is down about 20% in the last two years as gold prices retreated from their August 2011 record high of $1,888 a troy ounce.

Though investors like Mr. Tamayo have cashed out or lost interest amid the metal’s weak performance, many still believe. U.S. Mint sales of gold totaled 343,000 troy ounces this year through Friday, up 48% from the same period in 2012, according to data on the agency’s website. Silver sales are up 70% at 15.9 million ounces.

Sales of the coins, called gold and silver eagles, are viewed as a proxy for demand from small-scale investors.

Online gold and silver exchange BullionVault said that between Friday morning and Monday afternoon, clients had liquidated just 1% of their holdings.

Silver has dropped more than gold in percentage terms, falling 16% in the two days, to $23.361 a troy ounce.

Among those still banking on higher prices is Bill Rice Jr., managing editor at the Montgomery Independent, a weekly newspaper in Montgomery, Ala. In 2010, Mr. Rice inherited a collection of old silver coins from his father. To his surprise, the collection – a few silver dollars, along with half dollars, dimes and quarters from the days before 1965, when U.S. currency contained silver – was worth about $1,000.

Instead of selling the collection, Mr. Rice placed an advertisement in his paper offering to buy similar coins. When his first child was born less than a year later, Mr. Rice envisioned his growing silver collection funding her college education.

“I started getting really worried about unsustainable [government] debt,” Mr. Rice said. “I would rather put my fate in silver and gold, which have been around for thousands of years, than in central planners and politicians and too-big-to-fail banks.”

Mr. Rice estimated that at his peak, his silver investments, which include shares in mining companies, totaled more than $90,000.

“Today, I’m afraid to look,” he said.

Gold appeals to investors as a rainy-day asset, particularly for those suspicious of paper currency or the broader financial system, said Jeffrey Wright, a managing director and precious metals analyst with Global Hunter Securities.

The world’s major fiat currencies were backed by gold until the Second World War, and the dollar-pegged foreign-exchange system that came afterward was linked to the metal until 1971, when President Richard Nixon suspended the conversion of dollars to gold.

“I don’t really expect the world to come to an end,” said Robert Gordon, 60 years old. Mr. Gordon, president of a real-estate settlement company in Leesburg, Va., has been buying gold and silver since the late 1970s. “I’m not hunkered down with water, silver and gold coins, and guns. But I like having it. It’s not going to zero, and if stuff really gets bad, then you have some insurance.”

Mr. Gordon said he may buy more silver after Monday’s decline.