It's been a year since gold made history by reaching a high of nearly $1,034 an ounce. So why is it that this superhero of safe-haven investing has been languishing in the face of perceived dangers about a lengthy slump in the world economy, fears of a runaway global money supply and anxiety about inflation?
These are dark days in most markets, which might ordinarily seem to translate into very good days for gold. Although the world has been experiencing "one of the worst economic times in the past century, gold prices have yet to breach prices from a year ago," said Thomas Hartmann, an analyst at Altavest Worldwide Trading.
Futures prices climbed as high as $1,008 last month, only to crumble over the next eight trading sessions well below their historic high marked on March 17, 2008. That failure has left many market pros scratching their heads. Gold traders have waited in vain for gold's return to record territory as global economies continue to struggle and governments print money out of thin air. What gold really needs is "more evidence to support its cause," Hartmann said. "The market needs fresh, compelling news to take this market to new highs."
It did get a little of that evidence on Thursday, when the Federal Reserve vowed to buy government bonds, news that helped lift the precious metal's price by more than 8%. See story on the impact of the Fed's policy move. In that sense, gold has proven that it hasn't lost any of its appeal, even though the trading environment has changed quite a bit in the last several months. When gold was on making its mighty rise a year ago, it was a story of investors betting on the growth of China and other developing nations, says Brien Lundin, editor of the Gold Newsletter. And "through last fall, up to the present, gold performed as a safe-haven play. Scared money went into gold as insurance against global financial catastrophe," Lundin said. "Gold was not only the currency of last resort, it was also the piggy bank of last resort -- the ultimate source of liquidity."
It still is.
But the high in gold prices last year was largely due to the fact that the market was becoming "overheated [with] huge swathes of fund and investment monies, in a madness-of-crowds style, swamping what is a relatively small market," said James Moore, an analyst at TheBullionDesk.com in London. That was "unsustainable from a fundamental perspective as physical-jewelry demand tumbled," he said. Many other factors have worked against gold. The tightness of the credit markets has forced investors to cash in more profitable assets such as gold, according to Moore. Gold was also overbought, having "come a long way in a relatively short space of time, recovering form the October low of $682 to $1,006 in the space of around 16 weeks."
And it wasn't just gold that got hit during the initial deflationary response to the economic meltdown; all commodities suffered as well. Gold simply cannot "make too much headway in the absence of a broader commodity advance," said Ed Bugos, director of mining finance at Strategic Metals Research and Capital. Oil prices have dropped below $50 per barrel from their record of more than $147 in July.
Up until last week, Dennis Gartman, author of commodities newsletter the Gartman Letter, said he was bullish on gold. "When it began to fail, it struck me odd, for it has all the news possible to move higher and yet it can't," he said. Traders are long on gold, the gold exchange-traded funds like the SPDR Gold Shares gold trust gold are "way, way, way long, and with stocks around the world showing signs of strength, money shall move away from gold and into equities or other commodities," Gartman said.
Balancing weights
As the market waits for that to happen, gold's performance hasn't been all that bad.
"We went through the greatest liquidation of assets in 70 years," says Peter Grandich, a metals writer at Agoracom, an online marketplace for small-cap investors. And "gold's the only asset that still had a gain after all that." True, jewelry demand is suffering right now as luxury items take a hit. In India, traditionally the world's biggest consumer of gold, the jewelry market is changing. "Most of the jewelers are trying to be innovative in their jewelry designs in order to cope with ever rising prices," said Chintan Karnani, an analyst at Insignia Consultants in New Delhi. "Convincing Indians to buy gold at record high prices is very difficult."
If prices continue to rise, some Indian jewelers have said that the amount of 9-carat and 14-carat jewelry will start to rise, he said. Most of the jewelry sold in India is currently 18-carat and 24-carat purity levels.
Holdings in the SPDR Gold Shares are piling up at record levels, recently at 1,084 tons.
"The worldwide economic contraction has seriously impacted gold jewelry demand," Grandich said. "However, the large drop in that demand has been more than made up by investment demand for gold." Fear does move gold. Blanchard & Co., a major retailer of precious metals based in New Orleans, sold more gold during the 60 days after the fall of Lehman Bros. last September than it did during the previous three years combined, according to David Beahm, a vice president at the company. In a similar vein, last month marked "another" record-setting month for USAGOLD-Centennial Precious Metals, a coin and bullion dealer, as investors continue to seek a safe place to store their wealth. "They simply don't see any viable alternatives," said senior metals analyst Peter Grant.
'Intermediate' stage
For gold, these can be confusing times because the struggling global economies are having such a mixed effect on the metal market. But eventually, it'll all give way to show the metal's true worth. In late 1979, consumers and small retail investors sought to own and hoard gold, buying coins and bars. Jewelry boutiques and pawnshops alike were cleared out of their jewelry.
Thirty years later, the scene presents a sharp contrast. "Today, jewelers cannot sell their jewelry and pawnshops are extremely busy buying gold jewelry from the public," said Mark O'Byrne, director at Gold & Silver Investments Ltd. "This is a strong indication that we remain in the intermediate stages of the gold bull market."
The world's still a long way from seeing gold as something it can't do without. But "when that happens, the public will not part with their gold for love nor money," said O'Byrne. In the near term, if stock markets keep strengthening, gold could drop as low as $850 an ounce, according to Grandich. It won't likely see a record high again, he says, until the market gets through the seasonally weak period of May to September.
Lundin is more upbeat about the longer term. "In a future where every currency is competitively devaluing, where everyone is racing for the bottom of the hill, gold will outperform them all," he said. "The stock of every national currency will multiply in size, driving the relative value of tangible assets -- primarily gold -- much higher."
