Predictably, goldbugs — and, of course, gold-related businesses out to make a profit on bullion — have been very reluctant to believe the multiyear run for gold prices are over.
That’s a lot of surging … even though that verb is decidedly the opposite of what gold prices have been up to.
Case in point, gold dropped to its lowest level in a month on Thursday morning to tally a 18% loss year-to-date. Another 5% or so down from here, and gold prices will push through multiyear lows of $1,322 set in April.
So is the precious metal caught in a death spiral, or are we bouncing along the bottom?
I think it’s the latter.
The reasons for the decline are numerous and complex, but the basic factors are:
- Western investors have lost their faith in the precious metal as a safe haven, and there’s rotation out of the asset as a result.
- Even if gold was a safe haven, the “risk-on” nature of the market right now means investors are chasing returns in equities and not turtling up for trouble.
- Securitization of gold via ETFs like the SPDR Gold Shares (NYSE:GLD) and the iShares Gold Trust (NYSE:IAU) make gold easy to buy, but also incredibly easy to sell. That makes the market more volatile.
- The persistent strength of the U.S. dollar is keeping all commodity prices soft, from aluminum to oil to gold.
However, while I question the agenda of certain gold-peddling websites, it’s worth noting that the reports of “surging demand” are legit … at least in Asia. Cheaper gold prices have supported strong jewelery sales, and of course China’s central bank does buy commodities like gold as well as U.S. Treasuries for its reserves. India also remains a very strong market for gold.
This provides a decent floor, even if speculators are selling.
Furthermore, the recent jump in jobless claims and concerns about a tepid U.S. economy could hold back the dollar — and that might cause commodity prices to firm up.
Throw in some overdue consolidation for the stock market, and it could result in gold getting a little bit of its swagger back.
After the washout we’ve seen for gold, it’s reasonable to wonder how far it has to fall. And considering the stock market seems to go nowhere but up, it might seem foolish to chase gold when so many stocks are soaring.
However, it seems a real possibility that the selloff in gold is, in the short-term, exhausted. That might provide traders an entry point in the precious metal … presuming investing in gold at all is part of your strategy, which it admittedly isn’t for everyone.
- This April headline says it all: “Gold traders Split on Outlook as Asian Jewelers Buy.” (Bloomberg)
- George Soros is bailing out of gold. (MarketWatch)
- But Anthony Mirhaydari makes a great chart-based case for a gold rally. (MSN Money)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.