It's been more than a year since the yellow metal's serious run ended, relegating it to bouncing around a range far short of its all-time highs. Could 2013 change the game? MoneyShow's Howard R. Gold, also of The Independent Agenda, weighs in.
Gold was a quiet winner before its big sell-off this week. The yellow metal had worked its way up from around $1,560 an ounce back in July to nearly $1,800 in October. Just last week it changed hands at $1,750.
But then came waves of selling, which drove the price below $1,690 by Thursday morning, still slightly above support levels.
But gold has gone nowhere in more than a year. It peaked near $1,900 in September 2011 and hasn’t come within $100 of that since. It fell as low as $1,540 in May. Though it’s still up 8% in 2012, this year’s rally is looking pretty shaky.
And US stocks, which so many investors still hate, have wiped the floor with gold. Since last September 22, when stocks and gold began to decouple, the S&P 500 index has risen 25% while the SPDR Gold Shares ETF (GLD) has lost 3%.
So what’s next for gold?
Back in March, I wrote a column called “End of the Gold Bull on the Horizon,” in which I laid out a scenario where gold, well, just wouldn’t shine:
“If the trend continues, this might suggest a scenario of slowly recovering global economies, gradual deleveraging, and little inflation in the real world—plus a firmer dollar. All in all, it would be a recipe for higher share prices but continued weakness for gold.”
- Read Howard’s piece on the possible end of the bull market in gold at MoneyShow.com.
But some big things have happened since then. On September 6, European Central Bank president Mario Draghi indicated the ECB would start unlimited buying of European government bonds with maturities of one to three years. The program was aimed at backstopping the debt of fragile Eurozone countries like Spain and Italy.
And the following week (what a coincidence!), Federal Reserve chairman Ben Bernanke announced the US would embark on its own open-ended bond-buying plan, QE3. The Fed pledged to purchase an additional $40 billion of mortgage-backed securities each month until it saw “ongoing sustained improvement in the labor market.”
So, the Fed will be adding half a trillion dollars a year until who knows when, and probably won’t start raising short-term rates until 2014 at least. Most of that additional money will go into bank reserves, along with the $2 trillion the Fed already has added.
- Read Howard’s piece on why QE3 was a sign of the Fed’s failure at MoneyShow.com.
That could be a big problem when the economy recovers and those extra reserves start sloshing through the system.
NEXT: Currency Debasement and Inflation
|pagebreak|That’s likely several years away. But gold’s ten-year bull market has anticipated that, and people own gold to protect themselves against that nightmare inflation scenario.
“Monetary policy around the world is prompting investors to seek alternatives to whatever currency they’re in,” said Doug Groh, co-manager of the Tocqueville Gold Fund (TGLDX). “Developed countries are debasing their currencies, while emerging markets are buying gold.”
By the end of 2012, central banks probably will have purchased more than last year’s record 457 tons, paced by emerging market buyers like Russia, India, and Turkey. Brazil recently joined the party, making its biggest gold purchase since 2001.
Those two trends—extremely loose monetary policy and central bank purchases—should push gold prices higher, said Groh.
“I think in the next year we’ll see the $2,000 mark, and the gold cycle [won’t be] over until we see the $2,400 mark.” That’s the inflation-adjusted equivalent to the 1980 high of over $800 an ounce, he said.
His fund owns some physical gold, but mostly gold mining stocks. “Investors should have [gold exposure] through a number of vehicles,” he told me.
Gold mining stocks have lagged gold badly, especially as GLD, one of the biggest ETFs of all, “has democratized owning gold” and thus diminished the appeal of the miners for individual and institutional investors alike. (Full disclosure: Family members and I own small positions in GLD and Market Vectors Gold Miners ETF (GDX).)
Mining companies are beset by higher operating and capital costs, as well as scarce labor and greedy governments looking for a piece of the action, said Groh.
But the XAU, the Philadephia Stock Exchange Gold/Silver Sector, now trades at less than 10% of the price of gold, well below the average 13% to 14%. “When it’s on that level, it does signify a value proposition,” said Groh.
It’s only a value proposition if you think gold prices will rise, and that’s looking shaky now. Gold’s relative weakness in what’s usually its strongest season isn’t a good sign. But a successful resolution of the “fiscal cliff” standoff may be a boon for all risk assets, depending on how it’s structured.
- Read Howard’s take on how the president and the GOP could "split the difference" on the fiscal cliff at The Independent Agenda.
So, I’m holding on to a small position (5% of my investable assets) and waiting to see how far the sell-off goes. If gold stabilizes in the low to mid-$1,600s, I might buy a little more, but not much.
The big decade-long bull market in gold may be in its last innings, but I wouldn’t mind a little more cheap insurance in case the game goes on a little longer.
Howard R. Gold is editor at large for MoneyShow.com and a columnist at MarketWatch. Follow him on Twitter @howardrgold and catch his coverage of the fiscal cliff, politics and economics at www.independentagenda.com.