Since reaching a high price of $1,913 back on August 23rd of 2011, gold seems to have fallen off the investment radar screen.
In fact it seems the only time gold is ever on that screen is when it’s on its way to establishing new record prices.
Now that gold has settled comfortably in the mid-$1,600 range no one seems to be paying much attention.
But how should we take that?
Will gold slowly drift its way back down below the $1,000 mark, or will it—as some claim—continue to rise to ever higher prices punctuated by periods of price stability? And should we even consider gold as an investment?
Why invest in gold at all?
Whether you love gold or hate it, it does have its applications in a financial sense.
As we’ve seen in the past few years, gold performs very well during periods of instability. Whether the cause is economic (bad economy) or financial (inflation, credit defaults, rumors of sovereign defaults) gold thrives in times of instability.
While it can be (and often is) said that gold is an investment play on turmoil, the reality is that turmoil does happen in the world, and by buying gold you’re positioning your investments for that trend.
However, the fact that you’re buying gold in response to a negative trend doesn’t mean in any way that you’re causing the trend.
Still, its hard to see gold as an “all weather” investment either.
During periods of economic growth and low inflation gold tends to stagnate or decline. Also, since it isn’t an investment in the means of production, it isn’t a way of participating in an economic cash flow. That limits it’s investment value to certain periods of time, rather than qualifying as a permanent position in your portfolio.
What gold seems to be is a store of value more than an investment. It’s an asset that tends to perform well when other investment classes are falling, and that is a way of preserving purchasing power during rough economic times.
Why buy gold today?
We can pull out charts showing how well gold has done in the past, but given it’s wide swings, how does it look today? What are the reasons you might consider investing in gold right now?
- Though gold is off it’s highs, it’s down by less than 15%–that looks more like a cyclical correction than a wholesale reversal; the gold bull could still be very much alive;
- Government finances, particularly in Europe, continue to look questionable and a default even by a small government could quickly return the world to panic status;
- While the economy is showing signs of growth, much of it (foreclosures and employment) are still shaky;
- Alternative investments, particularly real estate and fixed income securities are providing flat or even negative returns;
- Interest rates are at record lows, which is a bullish sign for gold.
It could be said that all the factors that drove the price of gold to a record level are still very much intact—it’s just the public perception that’s eased up.
A rash of bad news, like the kind we’ve seen so many times in the recent past, could just as easily cause another run toward much higher gold prices.
Why you should you not buy gold today?
Gold has experienced extremely long bull phases, followed by even longer bear cycles.
The price rose more than 2,000% during the decade of the 1970s, but that spectacular run was followed immediately by a bear market that cut the price by more than 70% and lasted about 20 years.
Even if you’re a certified gold bug, you have to have some pangs of doubt in the future direction its price performance.
Consider the following factors that could lead to lower gold prices:
- Even though gold has fallen by about $250 from it’s peak last summer, the price is still high by historic standards—market tops are a strong sign to get out of an investment;
- The economy, in the US and globally, has stabilized and seems to be growing, however slowly;
- Most of the predictions of bank and sovereign defaults that fed gold prices haven’t happened;
- The atmosphere of panic that usually drives gold higher seems to have subsided;
- Stocks are showing solid signs of future growth and have potential for higher yields than gold;
- Since gold pays no interest or dividends, there’s no cash flow in the event higher prices don’t materialize.
We might be at a defining moment for the direction of gold prices.
Either gold prices have pulled back a bit on the way to higher—maybe much higher—prices, or it’s in the early stages of long term decline. If it is, it’ll be a long, painful way down.