As you may have seen, gold has traded off dramatically in the last few days, intensifying the magnitude of the metal’s slide this year. Since the beginning of 2013 gold is down 16% while the S&P 500 is up 12% (as of 4.15.13). This radically divergent performance is the result of many different gold price drivers coalescing to put an incredible amount of downward pressure on the metal. In times of uncertainty, gold is an attractive asset to hold as it provides a hedge against global economic risk, however, when investors feel that those risks are beginning to abate gold is liable to trade off. This is the dynamic affecting the price of gold in 2013.
The fundamental drivers of gold prices all stem from the markets for other investable securities. When the US dollar looks weak, or interest rates are low, or the stock market is volatile, gold looks more attractive on a relative basis as other assets are losing value. That drove gold returns through the financial crises and well into the recovery as the Fed kept interest rates artificially low in an attempt to weaken the US dollar and spur an economic recovery via improved exports and asset price inflation.
Now, investors are expecting QE to end sooner than originally expected on the back of an improving US economy. This is causing the US dollar to strengthen and real interest rates to creep up, all of which is bad for gold. To make matters worse, investors that focus on the technical relationship of price movements are selling gold as well as they feel that the metal has broken below a supporting price level and is in the process of resetting. While we don’t invest based on technical factors, it seems to be a significant impact on trading at this point.
We remain invested in gold and optimistic about its long-term benefits to client portfolios as the world is still a very risky place, and a small position in gold can help mitigate the impact of these risks. Central banks continue to devalue their currencies (see recent unprecedented actions by the Japanese), real interest rates remain low and offer investors no attractive alternative, geo-political risks continue to swirl and amplify, and inflation still looms. It is these factors that lead us to believe that the fundamental thesis in gold remains intact.
Investors are not used to seeing gold be volatile to the downside as we have seen this year. The asset has been a phenomenal performer over the past 5 years. Even with the recent move the metal is up almost 46% over the past 5 years while the S&P 500 is up only 28%. We continue to believe that a small position in gold is beneficial to clients and should help reduce overall portfolio volatility while growth is still challenged, global geo-political risks are heightened, and real interest rates remain well below 2%.