Mark Hulbert Wonders About Yesterday's Plummet

The given reason for gold's massive sell-off yesterday was the Japan reactor disaster, but Mark Hulbert isn't sure of the logic behind that explanation. In his latest column, he pegs gold traders' minset as "Sell First - And Then Ask Questions."

Consider what is perhaps the most-invoked rationale for investing in gold: It’s ability to hedge against worsening inflation. Isn’t that rationale even more compelling now than it was before the Japanese earthquake hit last week?

For example, the crisis undoubtedly will lead the Japanese government into spending a lot more money in coming years than previously planned — both in rebuilding the earthquake-ravaged regions, as well as in maintaining the value of the yen in foreign-exchange markets.

In addition, most analysts now seem to agree, the Japanese crisis makes it all but certain that the Federal Reserve in the U.S. will inaugurate yet another round of quantitative easing — QE3 — following the termination of QE2 this coming June 30.

Other things being equal, this should lead to more inflation, not less....

He also notes that gold is supposed to be a disaster hedge, but the tsunami-induced reactor crisis is a disaster. So was the earthquake itself.

Hulbert explains the plummet as resulting from previous overbullishness, which hasn't shrunk that much recently. To a contrarian, this means more declines are on the way to wring the enthusiasm out of the gold market.