There seems to be an endless ideological battle between those who believe adamantly in the surefire potential of holding gold (and sometimes only gold) no matter what, and those who see it as just another asset to buy or sell based on headlines and trends. And lately, the goldbugs have been on the outs as gold prices have slumped to a 2012 low.
But now that the precious metal has broken back below $1,600 an ounce, are gold prices going to move even lower? Or will gold rally as uncertainty picks up in the eurozone and global economic fears again snap into focus?
The Case for Gold
Famed commodity trader Jim Rogers says that stocks are set to take a spill and suggests investors take shelter in gold, silver and agricultural commodities. Rogers has a pretty good knack for picking the direction of gold, considering back in September he pointed out that the precious metal was set to take a spill that would last months. September saw gold crash from its record high of $1,918 set after the U.S. made a fool of itself via inept politicking around the debt ceiling debate, which resulted in the first-ever downgrade of the U.S. credit rating.
There’s also a May report from Goldman Sachs (NYSE:GS) that put a $1,840 price target for gold by year’s end. The Goldman report has familiar shock lines that appeal to the gloom-and-doom crowd, including labeling gold the “currency of last resort” and citing the death of the eurozone (or at least Greece’s membership) and debasement of the dollar as motivating factors.
And then we have the age-old “gold as an inflation hedge” argument. If the Federal Reserve indeed embarks on a third round of stimulus or “quantitative easing” in the summer months, you can bet there will be talk about how the U.S. central bank is devaluing our currency and risking widespread inflation — tied, of course, to talk of how everyone should hold gold before the dollar becomes worthless.
The Case Against Gold
Of course, the dollar argument swings both ways. Some are bearish on gold because, they argue, as the euro inevitably declines, the U.S. dollar will be the safe haven that investors need. Gold bugs insist the dollar is just as doomed as the euro, but many don’t buy that.
Also, let’s not sound the death knell for stocks just yet. The markets still are up significantly year-to-date despite some choppy going in recent weeks, with the Dow Jones up 5%, the S&P 500 up 8% and the tech-heavy Nasdaq up more than 10%. Investors seem to be interested in equities right now, despite some recent setbacks for Wall Street after a rip-roaring first quarter. Even gold stocks and ETFs like the SPDR Gold Trust (NYSE:GLD) aren’t pulling in converts as fast as they were last year.
Click to Enlarge And let’s not forget that gold is a notoriously volatile investment. In two years across 1980 and 1982, gold crashed from roughly $840 an ounce down to $300 an ounce. It tried to mount a small comeback, but by 1984 it was back to around $300. That’s a brutal loss from peak to trough.
Another rough time frame was the larger window of 1988 to 1993. Gold topped out at $500 or so before dropping to $360. It squeaked back up above $420 before falling to $330 by early 1993. Losing 34% across five years is hardly a case for gold as a “sure thing” as some would have you believe.
My two cents: It’s hard to tell what in store for gold — just as it’s hard to tell what’s in store for stocks. So the one thing that’s sure is that the tug-of-war will continue as the eurozone debt crisis reaches a fever pitch, and this historically volatile precious metal is going to see many big moves up and down.
That means investors can try and play the short-term swings in gold based on their read of the headlines … but don’t fool yourself into thinking this is an opportunity to load up on gold and stuff it in your safe for five years. The future is just too murky — and the volatility of this commodity is just too great — to make that leap with your money right now.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.