Gold makes people do wild things. Ancient Egyptians melted it to decorate their dead. Sir Walter Raleigh searched for a lost golden city. Shiny flakes of it set off a 19th-century rush to California and ship captains never stop looking for it at the bottom of the sea. Today’s investors are wildly selling it, with 2013 marking the first yearly gold-price drop since 2000. After jumping sevenfold during a 12-year bull market — a run matched by only a handful of assets, including U.S. Treasuries and stamps — it’s wallowing near a three-year low, down about a third from its peak. Only silver and corn performed worse among commodities in 2013.
Gold’s time-honored appeal as a haven from financial storms sent it to a record of $1,921.15 an ounce in 2011. Investors sought safety from the threat of faster inflation and weaker currencies as governments printed money to stimulate flagging economies. As growth signs returned, equities rallied and the metal began to tumble. Gold’s rout hurt holders such as billionaire John Paulson, producers like Barrick Gold Corp. and the biggest owners, central banks. Investors sold as much from physically-backed gold exchange-traded products in 2013 as they bought in the previous three years combined.
Discarded as a monetary system when the dollar’s peg to gold ended in the 1970s, it spiked to $850 in 1980. Prices slumped in the following two decades, spurring central banks around the world to shrink their reserves. When the financial crisis sent the metal higher in 2008, central banks started buying again. Investors flocked to gold-backed ETPs after the first one listed in 2003. Long-term bulls trusted an asset that governments can’t produce at will. Similar arguments are cited for the recent surge in popularity of Bitcoin, a virtual currency with limits on supply.
Is the latest fall of gold just another market cycle or a change in human appetites? Gold bears say the reasons for owning it are fading because inflation failed to quicken and economies and the dollar are strengthening. The U.S. Federal Reserve has started shrinking the bond-buying program it enacted to stimulate the economy, meaning it is confident the U.S. expansion will accelerate. Warren Buffett, the world’s most successful investor, has famously expressed his disdain for investing in gold. Bulls say consumer price gains are always possible and miners could produce less because output costs are rising. Falling prices may spur more demand from Asian nations as they get richer, as farmers keep gold for dowries and there are fewer alternatives there than in the west to store wealth.
The Reference Shelf
- Peter Bernstein, the late economic historian, explores the history of the metal in his book, “The Power of Gold.”
- Federal Reserve Chairman Ben S. Bernanke comments on understanding gold.
- The World Gold Council website has explanations of everything from the gold standard to central bank gold agreements.
- The British Museum’s “Beyond El Dorado” exhibition explores Colombian culture before Spanish arrival in the 16th century.
- Supply and demand figures.
- Industry facts and specifications.