Over the last ten years we gold owners have become a bit spoiled. We’ve enjoyed a near perfect record of double digit annual gains with very few protracted corrections. In short, gold has enjoyed about the strongest sustained bull market we’ve seen in any sector for many decades. This all culminated with new all-time highs in mid-2011, and since then the metal has been searching for direction.
Since 2001, there have been several major drivers for the gold market. In the early stages of the bull run, gold prices were pushed higher primarily by inflationary pressures and geopolitical concerns on the heels of the September 11th attacks. Surging oil and upward price pressure helped break gold free from the tight range below $300 per ounce in which it had been stuck for some time. Then through the middle of the decade the focus shifted to the long term downtrend in the US dollar, which helped drive gold to new nominal highs in 2007. Then came the global financial crisis, and everything began to change.
2008 became the “lost year” for gold, which only managed to stay in positive territory on the year with a last minute surge in late December. Even so, it was the only year of the last ten in which gold’s year over year performance failed to make double digit gains. So why is this? One would think that 2008 would have been a banner year for gold, which is typically seen as a safe haven asset. With the worst of the financial crisis unwinding in 2008, wouldn’t we have expected it to be one of the best years for gold?
The problem for gold in 2008 was twofold. First, gold had lost a major driving factor as concerns about inflation subsided when the global economy ground to a halt. Instead of fears about price increases, the opposite became the focus as economists and investors began to protect themselves against deflation due to the global crisis. This diverted investors’ focus away from gold. Second, the massive decrease in global risk appetite helped drive the dollar to new multi-year highs. Despite the massive long-term flaws in the US dollar as a vehicle for wealth storage, it was still seen as a short-term solution to the growing risks in other markets. The combination of these two factors left gold stuck in the middle with no driving factors and great competition for funds from US treasury bills.
Of course this problem didn’t last long for the yellow metal. As soon as the global financial system began to stabilize, fears developed related to the amount of new money being pumped into the system by central banks around the world. In 2009, a new driver emerged for the gold market: loose monetary policy and quantitative easing. Through the next two years, these concerns drove gold much higher, more than doubling the price in the aftermath of the financial crisis.
What we are seeing now is a situation quite similar to what we experienced in 2008. After the peak in gold prices last year, the metal has been bouncing around from one trading range to another, with little support structure to protect it from massive swings induced by traders and speculators. We have seen volatility, but no clear direction for the market. This is very similar to what we experienced in 2008. At the moment, the fear of another round of quantitative easing here in the US has subsided and thus removed one of the main driving factors for gold. This is not to say there will not be another QE program later this year, but at the moment it has been priced out of the market. Inflation concerns have not yet reared their heads, and thus gold is again stuck in the doldrums without short and mid-term drivers.
What is interesting is that none of the major investment banks and financial institutions are rushing out to revise down their price targets for gold. None of the central banks that have been net buyers for the last couple years are putting their gold supplies up on the auction block. Even the SPDR gold ETF holdings are remaining near all-time highs. None of the major mining groups are scaling back production and exploration. These are not the signs of a market headed for long-term crisis.
At the end of the day, there are far too many factors stacked up in gold’s favor for us to count the metal down and out. Don’t forget we have another two and a half years of near zero interest rates according to the Fed. Don’t forget that the long-term health of the dollar is still in a state of crisis. Don’t forget the trillions of dollars that have been created from thin air over the last several years. Gold is not down and out. It may be resting for the time being, but like 2008 it would be a mistake not to take advantage of this reprieve. Just remember the best time to buy something is usually when everyone else is walking away. By the time the public comes charging back into the gold market, some of the best buying opportunities may be behind us.
Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to firstname.lastname@example.org.