Gold is often described as a safe haven investment but its recent price collapse shows that it can also be highly dangerous.
The gold price soared in the wake of the credit crunch, when the global financial system teetered on the edge of collapse, to top $1,900 an ounce three years ago.
Some investors predicted it could hit $3,000 or $4,000, but the price dropped 28% last year as the global economy showed signs of recovery.
With the price hovering at around $1,300, anybody who bought at the top of the market will have learned to their cost that gold does not always glister.
Gold has rallied a little this year, but may struggle to make further gains, says Adrian Ash, head of research at precious metal specialists BullionVault. “Consensus analysis now sees gold prices falling again as stock markets keep rising and interest rates finally increase. Gold pays no income, so it’s a losing bet if the returns from cash or equities are strong.” This assumes the recovery will continue, Ash says. If the Chinese credit bubble, crisis in the Ukraine, eurozone meltdown or Middle East mayhem sink stock markets, gold could rise again.
Shaun Port, chief investment officer at online wealth manager Nutmeg, says gold has now been stripped of its safe haven status. “We think the price of gold is due another 20% fall.”
Unlike other precious metals, silver and platinum, gold has no industrial uses, which limits demand.
“We think that platinum, which does have industrial uses, is more likely to sustain its allure. Supply is more erratic than gold, which helps support demand.”
Platinum only costs around 14% more than gold, whereas over the past 50 years, it has typically cost 60% more, Port says.
When the US starts hiking interest rates, probably next year, the gold price could fall further, Port says, as rival investments such as cash become relatively more attractive.
If you’re still tempted, you can play the gold price quickly, cheaply and easily by purchasing exchange traded funds such as the SPDR Gold Trust ETF or Gold Bullion Securities. But unless we lurch into another crisis, it may be some time before gold shines again.
