Gold has plunged to its lowest level in three months. Gold fell almost $US58 to $US1, 614 per ounce on Wednesday. It has declined 15% since September 2011, when it hit a peak of $US1, 907 The tumble brought a nasty day to the stock market – the Dow Jones industrial average lost 125 points. Last year, this would have caused fearful investors to buy gold as a protective investment.
It seems everyone is drawing conclusion and hooking the surge in gold to dot-com stocks before they collapsed. Gold’s attraction as an asset of refuge during crises also seems to have diminished. The economy has picked up, and worst-case scenarios in the United States and Europe have faded. Fear has been gold’s best friend, and so to the extent that fear is dissipating, gold should fall.
The Fed minutes are like the line in the sand. It is when investors had to stop believing in the Fed fairy godmother and had to start dealing with true value. Gold has been hit in recent weeks by striking gold sellers in India, the world’s largest buyer of physical gold, who are upset over government tariffs. Another bearish sign has been a surge in the US dollar, which tends to rise when gold falls.
Gold brought $US300 to $US400 an ounce during the 1990s but has climbed steadily in the last decade, by late 2008, it was near $US900. It took off that northern autumn when prices for stocks and corporate bonds plunged, wiping out years of savings. Even money market funds looked suspect. Investors bid up prices for the safest of assets, like US Treasury bonds.
Demand for gold also surged as the Federal Reserve bought bonds, starting in the northern spring of 2009, to push down borrowing costs and stimulate the economy, a move known as quantitative easing. The Fed’s efforts to pump money into the banking system and avert a deep recession led to fears of runaway inflation, a concern shared by both the tea party and big-shot investors. Buying gold soon became a political statement.
For those who didn’t trust financial institutions or were wary of the government, it was the investment of choice. It became a way to speculate on the solvency of the economy or perhaps to speculate that the price would continue to rise, whatever the reason.
Gold was named the “best investment” in CNBC’s quarterly survey of investors released in March, topping real estate and stocks by a wide margin. That suggested that a solution to the European debt troubles is far from over – normally a trigger for buying gold, not selling it.
Bulls pointed out that gold’s popularity reflected a widespread scepticism of the financial system and of national currencies – and that investors were fools to feel confident about them.
The price may change but an ounce of gold is always bound to be worth something. Old stock certificates, may wind up worth no more than toilet paper. The gold rush isn’t over.