Gold (GLD) has gotten a lot of attention recently, and rightly so. Prices fell for 10 days in a row — the longest losing streak in nearly 20 years. They currently sit near five-year lows and are testing the critical $1,100-an-ounce support level.
Total return for gold is now back to even since 2007, as it has lost nearly half its value since the 2011 peak.
The sharp decline has investors wondering what’s next. Gold can be speculative and volatile, and I’m on record for the past decade as saying it should not be overweighted in anyone’s total investment portfolio – definitely no more than 10%.
That said, I was really surprised it peaked and began to slide as the Fed was printing trillions of dollars out of thin air, and that it would break down now with the prospect of the Fed hiking interest rates. Moreover, global turmoil didn’t provide a spark either. In fact during the China/Greece dramas, Bitcoin actually acted the way gold was supposed to act.
Gold prices are negatively correlated with the U.S. dollar — as the dollar’s value increases, gold’s value decreases as it takes fewer dollars to buy it. So it’s not necessarily surprising that gold prices have fallen as the dollar has gotten stronger in recent months.
My outlook is more of the same.
Gold is often seen as an inflation hedge, but global deflation is a bigger deal than inflation. Even members of the U.S. Fed openly fret about the lack of (official) U.S. inflation. Gold may well be undervalued, but the point here is that there is no urgency to buy yet.
I continue to watch gold prices, as they can change quickly. There are a lot of geopolitical issues — as well as a global debt bubble — that could spark a stampede to gold, but the recent end-of-the-world hype has been seriously misplaced.
If and when gold does start to rally, there will be plenty of time to buy. But for now, there is no reason to force the issue.
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