For much of the past decade gold was an extraordinary investment far surpassing virtually any asset classOn April 15 gold dropped 9 % in one day, its worst percentage drop in 30 years. Many are probably wondering what significance there is in this kind of price action.
It must be noted that gold is a commodity and commodities over time have exhibited volatile price swings. On the day gold dropped 9 %, silver declined over 10 %, so this type of price movement is not unique to gold. Oil over the years has also had periods of extreme volatility.
For those who think of gold as an inflation hedge, it is far from perfect. There are periods gold has done extremely well, such as in the 1970s, going from $35 an ounce to over $800 an ounce by early 1980. However, over the next two decades it dropped back to around $300 an ounce. Since 2000, gold has gone from $300 an ounce, peaking at $1,900 last year, and is now back to $1,400 per ounce.
Clearly if someone was in gold at the right time he/she would have done very well. However, few people are very good at market timing, so a long term investor could experience decades of disappointment with gold.
At the present time there are probably just as many people forecasting gold going to a $1,000 per ounce versus $2,000. The problem with gold is that there is no good way to establish what is fair value. It does have some practical applications for jewelry and dental work but those uses do not tend to drive its price.
While real estate and the stock market also have their good and bad periods, at least it is easier to establish a fair value range for those assets. That is because real estate and stocks generate income, whereas gold does not.
In a way, owning gold is like having raw land. There is no income being generated, but there can be periods the value increases, decreases or is just stagnant.
Other commodities, such as oil and copper, are more dependent upon global economic trends. Also, commodities are global in nature, so when the U.S. dollar is stronger commodity prices tend to fall. The recent drop in the price of oil and copper reflects both a stronger dollar and concerns about slower worldwide growth.
Lower commodity prices are good for the American consumer, as we have seen the price of gasoline come down recently. However, if commodity prices fall dramatically, as they did in 2008 that would be a negative sign for the economy.
Investing in commodities should only be undertaken by skilled traders, or those who might need to hedge a position for their business. For example, a homebuilder might want to guarantee the price of lumber or copper at a future date.
For the average investor I believe commodities are too speculative. Also, in the long run one could lose out with an investment that does not provide any income. For those who like gold and silver, I think it best that they restrict their investments to jewelry, or a coin collection. For those who think they are a skilled trader, they should still keep investments in gold or other commodities to a relatively small percentage.
The recent drop in commodity prices is mixed news for the stock market. To the extent that people are selling gold to invest in the stock market is a positive. However, if the global economy is slowing that is a negative. For now, I do not believe that worldwide economic growth has changed significantly enough to change one’s overall investments.
