One thing has been consistent with the selloff in gold. There’s always a really good story to explain why the market reacted the way it did. The initial move was the selloff triggered by the Bank of Cyprus announcing the potential sale of a portion of their gold holdings in order to relieve some of the stress of their failing financial institutions. The thought that gold would be an asset to relieve not just troubled Cyprus, but potentially all the struggling European nations started to spread.

The second move down was attributed to downward pressure from massive institutional sales and breaking the key technical support level of 1,550 US/oz. Outflows from gold backed ETF’s began to see record levels as the masses headed for the exits. In accordance with this, the fears began to surface that tapering of the Fed’s asset purchases would soon begin.

This most recent selloff, and again linked to the Fed and the explicit language chosen by Chairman Bernanke was that the US economy is healing, and aggressive monetary support should no longer be needed should the trend continue. If we incorporate this with a staggering economy in China and the stress their banks are under as a result of tremors in the Shibor market (the interbank lending market for their banks) the pressure on gold seems insurmountable.

Gold’s run, however, began long before talk of Quantitative Easing. It was the move into real assets in the beginning of this century as interest rates continued to move lower and lower. So as stimulus provided in the form of Quantitative Easing was a great catalyst for gold, it has really been this epoch of falling interest rates that has been supportive of this market. Initially the “Greenspan Put” and what has become the “Bernanke Put” was gold’s best friend. Unfortunately though, the potential collateral damage done to the economy through central bank induced asset bubbles is yet to be realized.

Some analysts use the term “stable disequilibrium,” and I truly believe that is the economic environment we are in today. The workings of western central banks’ and the asset bubbles that they have not only created, but sustained is what has prompted this extreme volatility in financial markets. The best story for gold stems beyond the idea of an inflation hedge, or for that matter a store of value. Gold is the hedge against economic uncertainty. Plain and simple, it is valued for its role in history; it is not valued because of some revelation of its existence in the last ten years.

The problem with gold is that it has become victim to the herd mentality that creates this volatility and price instability in financial markets. Since becoming more and more accessible via exchange traded funds and more and more popular for speculators in the futures market, it became vulnerable to the same instability that is prevalent in all markets today. It is not so much that the belief in gold has ended, yet the current trend, or fad if you will, is coming to an end.

This herd mentality was present in the physical market as well. It was seen when silver was moving past 40 dollars an ounce, and without much thought physical positions were being accumulated by novice investors who were looking to make a quick profit. If only it was that easy. Gold isn’t a get rich quick scheme and it never has been. In the long term it has the potential to be a store of value. To not be too cliché, “an ounce of gold buy’s a decent man’s suit.”

The above should not been taken as a defence against the selloff in the gold market, or a bleak diatribe on the world’s financial markets. It’s just meant to be plain and simple. Gold is a hedge against uncertainty. It is a long term play. Like any asset, it contains risks. There are buying opportunities, and there are times to sell. Over the next several months to two years, it is my opinion that there will be good opportunities to make long term play in the gold market.

It’s hard to avoid the topic of how the emerging market funds have been absolutely hammered in the last month over the premature fear of interest rates starting to creep higher in the United States.

The sophistication and liquidity in these country’s financial markets, despite their economies still being in an emerging market stage, has allowed currencies like the South African Rand to fall by 16 percent against the US dollar so far this year. Other currencies like the Brazilian Real or the Turkish Lira are down 3.7 and 4.6 percent respectively, and it’s all based upon the notion that interest rates are going to move higher in the US. This has investors scrambling for yield back to North America where the prospects of a stronger US dollar not only hurt the emerging market currencies, but also take investment away from their individual economies.

Like commodities, shares of small capitalized firms, and sovereign and corporate bonds, the emerging markets have been beneficiaries of this sustained period of record low rates. JPMorgan estimates corporate external debt from these countries has more than tripled since the onset of the 2008 crises. Not only the direct influence of investors searching for a returns outside of their normal investment arenas, but as well the idea that developed economies have plateaued in their economic advancement, and relatively greater opportunities could be found elsewhere in the world. As PIMCO’s Bill Gross points out, “investors [have] to take increasing amounts of risk, but for lower yields and more volatile returns.” First it was the BRIC’s (Brazil, Russia, India, China) and then the CIVETS (Columbia, Indonesia, Vietnam, Egypt, Turkey, South Africa) that have required investors to be more and more creative to determine where to put their money.

At the center of this is US Fed policy, and that’s where markets will continue to focus upon once again next week. This will be Bernanke’s attempt to calm markets in his team’s policy announcement and the press conference following, on Wednesday. The issue is that the last time Bernanke spoke (which was before Congress’s joint Economic Committee) was that he roiled stock markets and sent bond yields higher. During his testimony, when addressing tapering back on the Fed’s current asset purchases from 85 billion in accordance with the economy improving, the market misunderstood Bernanke and took this as the Fed will start raising rates. Investors seemed to have forgotten that not only has the Fed pledged seeing the unemployment rate fall to 6.5 percent, but also that they have attempted to end the process of quantitative easing three times in the past and failed. Bernanke has assured us he is not going to make the same mistakes as the US Fed did during the Great Depression.

It’s my impression that he is going to attempt to calm markets and in turn force down yields once again. Too many investors have falsely anticipated what looks to be a premature exit or tapering from QE. It’s all too apparent that the Fed would not like this as it diminishes the wealth effect that they have created and are trying to create from a continued rally in the stock market. Investors, who were trading off a whim in the last few weeks, hear the term taper and figure the game is over and start running for the exits. This is not how the Fed see’s their stimulus efforts playing out. They purposely suppress long term interest rates to aid home owners with long term mortgages. When the 30 year mortgage in the US jumps suddenly back over 4 percent, it means trouble for the marginal borrowers who are the target of the feds efforts.