Following a dramatic fall in the price of gold in April some are writing off the yellow metal as a purely speculative investment that has seen its best days. Others, among them some very well-known investors, including Jim Rogers and Marc Faber, are still confident that it remains a good long term investment, a hedge against debased currencies and further global economic turmoil.
It is undeniable that gold had a great run, rising six-fold from January 1999 (approximately $288 an ounce) until peaking in September 2011(approximately $1,895 an ounce), before trading sideways and then plummeting to below $1,350 an ounce in April this year.
Opinion is divided over whether the gold price was a bubble that has now popped. Certainly, the 20% fall means that we technically, and briefly, entered a bear market for gold.
Still, even at its recent peak gold, in inflation adjusted terms, never hit the heights it achieved in 1980 (it would have to be over $2,300 an ounce to do so).
Since 1980, the mighty dollar has lost much of its purchasing power unlike gold. Hence the latter is seen as an (admittedly imperfect) hedge against inflation and catastrophes such as currency collapse, war and disaster.
Although reliable figures are hard to come by the recent falls in gold’s price appear to have seen demand for gold bullion increase. For example, it was reported in the Wall Street Journal that the US mint had suspended sales of small gold bullion coins due to demand.
Reasons for Gold’s Fall
Various reasons have been given for gold’s fall in price. It does appear that many investors have lost their fear that central banks are about to revive inflation. This is important because a bet on gold is essentially a pessimistic play on inflation.
Fears of a slowdown in China combined with confidence that the US economy is reviving have probably encouraged many investors to switch funds out of gold into US equities.
However, there are contradictions at the heart of this. If China’s economy continues to slow down it will impact a weak US recovery and by extension make the environment tougher in the eurozone. Moreover, US and eurozone debt mountains can’t be printed away by quantitative easing alone and the risks to a systemic shock to the banking system remain.
Some also argue that inflation is not only under-reported but being deliberately stoked by money printing in order to try and inflate away the sovereign debt burden of governments.
At its most extreme, followers of this line of argument propose that the US government is manipulating the price of gold in order to try and maintain the strength of the dollar. They cite the scope for price manipulation and the rumour that a hedge fund dumped $20 billion of paper gold on the day gold first fell dramatically.
The legendary maverick investor Jim Rogers certainly doesn’t put much store in the manipulation argument. In anexclusive interview with Morningstarhe said: “I’ve been hearing that argument for gold and silver for about 30 years. Even if someone can manipulate a market for a day or two they can’t manipulate it for a month or two or three. So I don’t put much stock in that.”
While not buying more gold currently, Rogers is optimistic on gold’s prospects over the next decade. “Certainly, over the course of ten years gold will go much, much higher because I don’t see any possibility that governments are going to stop printing money in the next decade. And as long as that is going to happen then the gold is certainly going to go higher and probably much higher.”
Similarly, Marc Faber, one of the world’s leading investors, is still bullish on the medium term prospects for gold. In a recent interview with Bloomberg he said, while the yellow metal could go lower in the short term, “the bull market in gold is not completed” and its fall was a “buying opportunity.”
On the other hand, Warren Buffett has long been dismissive of gold as an investment given its essentially unproductive nature and its lack of dividends.
It’s a view shared by Morningstar columnist Rodney Hobson, while Morningstar’s view is that the long term price of gold should be around $1,100 an ounce.
Conclusion
Clearly, while predicting the short term price of gold is nigh on impossible, there is no consensus about its long-term value either.
Ultimately, whether to hold it depends upon your view of where the global economy is heading and whether your portfolio requires that degree of diversification.
Still, in such uncertain economic times it may be premature to throw out the golden baby with the bath water. Indeed, gold is likely to be used as a medium of exchange long after the US dollar is no longer the world’s reserve currency.
