Gold prices have slipped again this year, with the precious metal down more than 40% from its 2011 peak.
We’ve been here before. Gold prices were around $1,140 an ounce in early November, before staging an impressive run back up to about $1,300 by late January, almost a 15% gain.
Difficult as it is in this age of Internet trolls, I try to be agnostic about gold and think purely about its investment potential in the here and now. I couldn’t care less about conspiracy theories — what I want to know is whether I can make money on this trade, given that gold is so volatile.
So what’s in the cards for gold now? Are current prices a bargain as they were last fall, or will the recent declines continue?
I believe it’s the latter. But that doesn’t mean a savvy trader can’t make a profit with a targeted short-term play on gold or gold miners.
Gold’s January head fake
Gold’s jump at the beginning of the year was largely a head fake. Investors were rattled by weak retail sales and consumer spending to start the year, and conflicts in Russia and in Iraq helped fan the flames of uncertainty for many gold bugs.
But subsequent economic reports have proven that fears over consumer trends were overblown, with a series of encouraging jobs reports and a nice retail sales bounce in May. At the same time, geopolitics was moved to the back burner as investors lost interest in troubles abroad.
Throw in the fact that the U.S. dollar staged an impressive run, and the scales were tipped decidedly against gold in spring. Quantitative easing in Japan and obvious problems for the euro amid a Greek debt crisis favored the greenback, and a stronger dollar naturally means weaker prices for commodities such as gold that are priced in U.S. dollars.
It’s also important to note that the broad trend for gold has been downward since 2011 because of some rather massive market dynamics, namely the end of a so-called “supercycle” for commodities. From the 1990s through the financial crisis, prices of commodities from gold to copper to oil were surging on strong emerging-market demand and supply bottlenecks, and then the bottom fell out.
It’s hard to imagine these challenges abating anytime soon. The U.S. dollar remains rock-solid vs. the yen, euro and other currencies, and with the Fed talking about raising rates before the end of the year, that trend is assuredly going to continue. At the same time, emerging-market demand has been soft. Consider gold in India is actually discounted significantly vs. global pricing as jewelry demand remains weak even in this nation where gold remains an important cultural touchstone.
Long-story short: January’s high was a head fake, and the long-term trend remains decidedly against gold.
