There are few more polarizing topics in the world of investing than gold.
The shiny metal, which for centuries was the basis of the global monetary system, is beloved particularly by investors whose political beliefs tilt libertarian. These are the sort of people who are convinced of the incompetence of political leaders and central banks that now run a monetary system based on floating exchange rates rather than the value of hard metals.
Gold enthusiasts had their moment in the sun during the 2000s, when the combination of rising deficits and a sharply falling dollar helped give the precious metal its best stretch since the inflation-racked 1970s and 1980s. The financial crisis only increased gold’s appeal, when it seemed like governments around the globe might not be able to save their banking systems from total collapse. A few years later, the European debt crisis added even more weight to the notion that the price of gold could only go in one direction: up.
Since gold’s peek in the fall of 2011, though, it’s been in a free-fall, confounding the gold-bug community.
Gold Price in US Dollars data by YCharts
As Barry Ritholtz of Ritholtz Wealth Management points out, none of the arguments put forward by the gold-bug community in recent months have actually panned out:
The ballot proposal requiring the Swiss National Bank to hold at least 20 percent of its 520 billion franc ($523 billion) balance sheet in gold was rejected by Swiss voters. Another tale: India was going to cut its import duty on gold, leading to soaring demand. But India decided to maintain the duty. The latest bout of wishful thinking was that a gold version of the new Apple watch would consume “up to 756 metric tonnes of gold per year . . . this equates to roughly a third of gold’s total annual global mine supply,” according to a company called Goldcore . . . that fantasy was laughable on its face.
Instead, the continuing strengthening of the dollar—a trend bolstered by the end of QE and the apparent strengthening of the U.S. economy—has continued to force gold prices downward. But the bottom must come at some point. Gold, after all, isn’t some pumped-up penny stock. There will always be strong and consistent demand for the metal as jewelry, especially in a world where nations like China and India have rapidly growing affluent classes. Meanwhile, central banks across the world maintain large holdings of the metal, and the idea that gold is a hedge against catastrophe isn’t going away anytime soon.
Analyst Jim Bianco of Bianco Research argues that gold may have already reached its bottom. His first point is from the “technical analysis” school, which looks at historical patterns in stock charts to predict future movements. Gold has nearly fallen 50% from its 2011 peek, a critical level for believers in technical analysis, when stocks and commodities often rebound.
Second, Bianco points out that if you look at Gold ETF data, much of the dumb money that jumped on the gold bandwagon during the frantic post-crisis years has left. Gold’s big post-crisis surge was driven in part by ETFs that allowed average investors to get in on gold’s rise easily and inexpensively. But today, the gold holdings of ETFs are lower than they were in 2010, before much of gold’s crisis-driven ascent.
Bianco also points out that money managers overall have not been as down on gold in the past 10 years than they are today, as measured by net long positions in the metal. When the rest of the crowd doubts an investment, it’s often the smartest time to buy.
For the average investor, it makes sense to steer clear of large investments in gold. The precious metal isn’t going to replace the fiat monetary system anytime soon, nor does it look like the wave of government defaults and hyperinflation that gold bugs were calling for in the months immediately following the financial crisis and European debt crisis will be upon us any time soon.
But gold will bottom out at some point, be it at $1,100 per ounce or $500 per ounce. And the savvy—or just plain lucky—professional investor who picks the bottom accurately, and at the right time, will stand to clean up on this trade.