The Wall Street Journal reports, ''gold rose on basic economic fears in the 2000s but fell back starting in 2011 as those fears abated. Now, with fears spreading again about the withdrawal of Federal Reserve stimulus and about global growth, gold has rebounded 11% since mid-December''.
Experienced gold analysts are warning clients to be careful: If the fears subside, the price of gold could do the same.
“Gold goes up as an insurance policy and then it is sold at a loss when people no longer want insurance,” said Rhona O’Connell, head of metals research and forecasts at Thomson Reuters GFMS, a research firm known for its work on gold.
Gold could move higher in the short run, but Ms. O’Connell says its price is likely to have trouble making significant gains before 2016 at least, because basic economic confidence has improved.
Sameer Samana, senior international strategist at brokerage firm Wells Fargo Advisors, is urging clients to treat gold’s rebound as an opportunity to sell anything they still have.
“What we have found in our work is that a broad basket of commodities is a better hedge against inflation, a greater diversification and a better hedge against the dollar,” Mr. Samana said.
Gold does well “when you are very nervous about the world,” he said.
He thinks metals like copper, aluminum and zinc, which unlike gold are used primarily in industry, are a better bet in a time of economic recovery.
Gold differs from almost every other investment in an important way: In practical terms, gold isn’t very useful. A small amount is used for rings, necklaces, watches, dental implants and electronic connectors. But the vast majority is hoarded in the form of bars, coins or, in the developing world, heavy jewelry that is treated more as a protection against disaster than an adornment.
Unlike stock, gold doesn’t offer a share in a business’s results. It doesn’t pay dividends or interest. It doesn’t grow things like farmland, provide shelter like a building or have industrial uses like most commodities. The one time it is useful is when people are fearful and flee to it.
Gold soared in the 1970s amid oil crises, the seizure of the U.S. embassy in Tehran, runaway inflation and a volatile stock market. After that, gold’s price collapsed as the world economy recovered.
Gold rebounded in the 2000s as stocks and the U.S. economy endured disastrous troubles. But gold peaked in 2011, the year Standard & Poor’s downgraded U.S. sovereign debt and stocks nearly went into a bear market, defined as a 20% fall from a high. Economic stability since then has put a lid on gold.
The Permanent Portfolio, a San Francisco-based mutual fund that offers a mix of bonds, gold, stocks and foreign investments, saw its size balloon to $17 billion a year ago from just $57 million at the start of 2000. Now it is back to $9 billion.
Michael Cuggino, president of Permanent Portfolio Family of Funds Inc., says gold wasn’t the only reason for redemptions; investors have fled bonds and other conservative investments. Some have returned to his fund since gold began recovering in December.
Still, “when people got concerned about gold in the second quarter of last year, there were more redemptions than previously,” he said.
Mr. Cuggino thinks gold prices probably will edge upward in the future, but he sees the market mentality shifting.
“People talk about diversification but they don’t always live it,” he said. Right now, investors seem to him more concerned about returns than protection.
One reason for gold’s rebound is demand in China and India. Worries about developing-world economies helped fuel that demand. As Western investment funds sold gold, Swiss refineries worked overtime to recast big bars favored by Western banks into smaller ones preferred in Asia.
But Asian hoarders are sophisticated. They buy when gold is down and sell when it is up. Asian demand isn’t strong enough to offset continued Western selling, according to Ms. O’Connell of Thomson Reuters GFMS.
“Physical demand puts a cushion under price. It isn’t enough to turn prices higher in the face of weakness in investment demand,” she said.
What would sustain gold’s rebound is more fear. Without that, gold could have trouble getting back to 2011 or 2012 levels.
