1. Photographer: Andrey Rudakov/Bloomberg

    commodities

    David Fickling

    David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

    Remember that investment-fund disclaimer about how past performance is no guarantee of future results? It's worth pondering it if you think this is a good time to be buying gold.

    The metal posted its biggest monthly gain in four years in February and Taurus Wealth Advisors argues it could be headed toward $1,400 an ounce from the current $1,245 as central bankers run out of ammunition to stimulate their economies. 

    That's the sort of good news that should drive a circumspect investor to press the sell button.

    There are factors that are bullish for gold at the moment. Expectations of further rate hikes by the Federal Reserve, which typically weigh on the price of the yellow metal, need to be tempered. The U.S. 10-year TIPS spread, a measure of market inflation expectations derived from the yields on U.S. government bonds, touched its lowest level since 2009 last week, suggesting traders expect annual inflation over the coming decade to average a sickly 1.24 percent.

    That's not a picture that would encourage further rate rises, and indeed the futures-implied Fed Funds Target Rate for this September is 0.47 percent, marginally below the current 0.5 percent.  Or look at Japan, which Tuesday sold 10-year government debt at a negative yield for the first time.

    Deflating Inflation
    Market expectations of 10-year inflation are at their lowest since 2009. That's good for gold
     
    Source: Bloomberg data
    Note: Gold price has been recorded per 0.1 ounce to give a comparable y-axis with the TIPS spread. A TIPS spread of 100 is equivalent to expectations of 10-year average inflation at 1%

    There's also been a shift in market sentiment. Exchange-traded funds have been net sellers of gold in each of the past three years, compounding the price decline by putting more ounces on the market each time the price dropped.

    Who's Buying?
    Central banks and ETFs are the marginal buyers and sellers of gold, but jewellery and bullion are the biggest consumers
     
    Source: World Gold Council

    That appears to be changing. Money managers now have the biggest net-long positions in Chicago gold futures since last February, and holdings in the largest gold-backed ETF, SPDR Gold Shares, are at their highest in a year.

    There are also bearish factors. Societe Generale's commodity strategist Jesper Dannesboe recommends shorting gold, citing its current anomalous outperformance of the Bloomberg Commodities index and resistance to U.S. dollar strength, which normally drives down commodity prices.

    So who to believe? The problem for gold, as Bloomberg View's Barry Ritholtz has argued, is that its price oscillations more or less defy rational analysis. Investors can quit an asset as quickly as pile into it, so positions data should be taken with a pinch of salt. Easy money failed to pump up prices of the shiny stuff as it tumbled 37 percent over the last three calendar years, so you can ignore the Fed as well. Making predictions about gold based on fundamental analysis is about as instructive as throwing darts at a board.

    Coin Toss
    The worst time to buy gold rather than the S&P 500 is when prices of the precious metal have been outperforming
     
    Source: Bloomberg data
    Note: U.S. public holidays have been excluded, because gold is traded but not the S&P 500

    So why not embrace that randomness? Take 10 years of prices for spot gold and the S&P 500 index. Measure the change in each index over the previous 20 trading days and the coming 20 trading days, and have a look at how often a trading month of outperformance was a good buy signal. Out of 2,478 instances, a month where gold outperformed equities was followed by another month of outperformance on only 620 occasions, or 25 percent of the time. The probabilities average out about the same as you'd get from tossing two coins. 

    Gold's had a spectacular bull run. Odds are, it's already over.

    This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at dfickling@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net