Stocks aren’t the only investment confounding investors with mixed messages. After an 11-year bull run, gold prices started sinking late last year, and a springtime swoon pushed the precious metal perilously close to official bear-market territory. From a peak of $1,889 an ounce last August, gold sank to $1,536 an ounce in mid May, down 19%. May marked the fourth straight monthly decline for gold—the longest losing streak in 12 years.
But at the start of June, after the market got wind of rising unemployment in the U.S., gold surged 4% in a day to $1,621 per ounce. Is the long, profitable run nearing the finish line? Or is the dip an opportunity for investors to burnish their portfolios with some of the shiny yellow stuff?
Those questions might be easier to answer if investors could gauge what gold was likely to react to (and how) at any given time. Gold is a safe haven when economic turmoil in Europe heats up—except when it boils over and the flight to quality heads straight for the U.S. dollar and Uncle Sam’s debt. Buying gold is the anti-stock-market trade—except when gold prices and stocks move in tandem. “Gold is responsive to a number of things in the market,” says Doug Groh, a portfolio manager at the Tocqueville Fund. “Interest rates, inflation expectations, changing foreign-exchange rates, sovereign-debt issues, political issues are all important drivers.”
For now, it’s important to put the recent decline in perspective. A 19% drop barely registers when you look at the sevenfold gain in gold prices since 2001. And gold bulls say the yellow metal still has plenty to recommend it. Analyst Leo Larkin, at S&P Capital IQ, sees gold prices fluctuating within a narrow range for a while before resuming an upward trend toward $1,900 per ounce by year’s end. Analyst Michael Widmer, at Bank of America Merrill Lynch, is an even bigger bullion bull, predicting $2,000 an ounce this year. But gold will have a hard time pushing past that milestone, Widmer says.
The theme that the bulls keep coming back to is the massive infusion of cash by the world’s central banks to shore up struggling economies. “The more liquidity you put in the system, the more concerned investors become about inflation down the line,” says Widmer. As inflation (or just the fear of it) whittles away the value of paper currencies, hard assets shine—and gold, at the moment, is beating other commodities hands down. “If we were to see China’s economy bottom, we’d like industrial metals,” says Paul Christopher, chief international investment strategist at Wells Fargo Advisors. “If we saw the U.S. and Europe recover, we’d like energy prices. Right now, gold is doing better than the rest of the commodity basket.”
As long as interest rates are near zero, gold, although it pays no dividends, stacks up well against low-yielding alternatives. When rates rise above the inflation rate, gold will suffer.
Even if you’re a believer, gold is best sampled in moderation. Growth-oriented investors who have, say, 5% of their assets in commodities should earmark 1% to 2% for gold, says Christopher. An easy way to invest is through an exchange-traded fund such as iShares Gold Trust (symbol IAU).
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.