For years I was optimistic about the price of gold. It rose steadily as investors welcomed the 21st Century. I watched as it continued to creep upwards despite the financial meltdown of 2008. In September 2011 when the price was pushing US$1,900 an ounce, I breezily predicted it would reach US$2,000 by the end of that year. It didn’t.
Early in January 2012, I was forced to backtrack on my prediction. “I had not reckoned what effect the European debt crises would have on the gold price. Nor could I predict the longer term effects of the Japanese earthquake, the wrangling of lawmakers in the United States over that country’s ballooning debt, or the effect of world opinion on rapid political change in the Middle East,” I wrote.
So much for my ability to predict the price of gold. I’ve not touched on the topic recently. But I must as the yellow metal hit a low of US$1,226 per ounce – lower than it has been since Aug. 10, 2010 when it bottomed out at US$1,192.50.
So what happened? Why are investors fleeing gold?
I don’t doubt that the fundamentals of gold investing have changed greatly in the 30-odd years I have been a mining industry observer. In the 1970s investors were told to hold 10% or 15% of their portfolios in physical gold. It was portable and easily sold anywhere in the world. That advice seems to have lived out its usefulness.
The most recent gold price drop is probably related to the increasing strength of the American greenback. That country was severely affected by the 2008 economic problems, but it is finally showing signs of regaining its financial prominence. House prices are ticking upward, and the U.S. unemployment rate despite a fractional rise in May 2013 to 7.6%, is much improved from the 9.1% level that persisted last summer.
I also have to think the speed at which information is available on the internet has something to do with the gold market. Instant communication from the far corners of the world was unavailable 40 years ago. It took a few days for news of unrest in one region to find its way to a broad audience. Likewise, buying or selling gold sometimes took a few days ,,, over a weekend maybe.
Such delays are a thing of the past. Even “day trader” may be shifting to “hour trader” or “minute trader” as people are less tolerant of transaction delays. At that pace, I suspect only well heeled and exceeding sophisticated investors or multi-billion-dollar pension or mutual funds can get in and out of the gold market so quickly that a little rise in price translates into a six-figure or more profit taking.