18th April 2012

The economic volatility of last year made it a sparkling year for gold prices. Fears of global market turmoil helped push the yellow metal to record highs, and it reached $1,920 last September.

However, deep into the 12th year of a historic rally, fans are wondering whether the metal is due for a pause, says the Wall Street Journal.

The yellow metal is currently trading at around $1,600 an ounce. Yet renewed panic about debts in the eurozone last week caused the price of gold to rise to $1,700, triggering predictions that it may soon rise again.

But history shows the path doesn't always run smooth. From its peak in 1980, the price of gold fell by 65% in less than two-and-a-half years, and took more than 28 years for the 1980 peak to be reached again and investors to get their money back – not even taking into account the effects of inflation.

It seems that while the long-term bullish outlook for gold remains for many, short-term pressures have halted its steady climb. The Gold Survey from Thomson Reuters predicted last month that gold could reach $2,000 an ounce by the end of 2012 or in early 2013.

This is Money says this phenomenon has been keenly noted by private investors who have poured billions of pounds into the precious metal.

Investors have also appreciated the unique qualities offered by gold as an asset class all of its own. The financial crisis taught investors that banks can and do collapse, and physical gold gives no exposure to financial institutions. Another appealing characteristic of gold is its ability to weather inflation.

Robert Farago, head of asset allocation at Schroders Private Banking, said he was worried about the growing correlation between gold and other risk assets, which reduces the "metal's attraction as a portfolio diversifier". But he stressed that Schroders would retain an allocation to the yellow metal.

But gold is still benefiting from concerns surrounding the global economy  – although this has been rocked by signs that the US economy is stabilizing, giving investors fresh cause to wonder if there might soon be better returns elsewhere.

Since late February, hedge funds, pension funds and other money managers have slashed by 39% their futures-market wagers that gold will rise, says the Wall Street Journal. In the same period, they increased by 87% their bets that prices will fall.

Any sustained pause in the gold rally could have far-reaching consequences for investors, and reflect a new phase of the halting recovery from the global financial crisis that rocked markets in 2008. Gold prices have nearly doubled since the end of that year, while also serving as a sign of investor discomfort with how governments have tried to solve the problems.

Gold has long sparked debates, not least because it is difficult to value and generates no income. Lately, the metal has been used as a haven against currencies being debased by stimulus, and by those predicting the monetary injections will lead to inflation down the road. Any good news economically is negative for gold.

For now, there appears to be enough economic and market uncertainty to give gold an edge. And the bulls still see potential gains as the world works through its problems – including Europe's debt woes and the Fed's bloated balance sheet.


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The Financialist

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