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November 01, 2008 at 04:00 AM
After breaking the $1,000 an ounce barrier during the spring, gold’s seemingly invincible run has hit a brick wall. Has gold lost its mojo?
The price of this storied yellow metal has been steadily sliding over the past few months. Since touching all time highs, exchange-traded funds tracking the price of gold have been all over the place. After falling around 20 percent into bear market territory, gold has recently recovered.
The two gold-focused ETFs are the iShares COMEX Gold Trust (IAU) and the more heavily traded SPDR Gold Trust (GLD). Through mid-September, both ETFs are up around 3.5 percent year-to-date.
Despite gold’s choppy year-to-date performance, it’s still outperforming broad equity indexes. Over the same year-to-date time frame, the S&P 500 (SPY) has fallen 20.2 percent, the Dow Industrials (DIA) is down by 19.5 percent and international stocks (VEA) are off by 27.6 percent.
Is the bull market in gold over?
Even factoring in recent declines, gold’s price has still managed to double since the start of 2005.
Some analysts remain convinced that gold’s multi-year gains aren’t over. They point to gold’s recent weakness as mere consolidation and argue that long-term fundamentals remain intact.
Recent data reveal a slowing world economy, which has trickled down from the slumping U.S. During the second quarter the economy in Japan and Europe contracted. A worldwide economic recession could boost demand for tangible assets like gold.
One of gold’s most outspoken advocates is James Turk.
He’s called for gold prices to reach as high as $8,000, which has led some observers to scoff at Turk’s forecast. True, it may be a while before gold reaches those levels, but Turk was accurate in forecasting gold passing the $500 barrier in 2005.
Why has gold fallen?
One of the reasons for the recent weakness in gold performance has been a rebound in the beaten down U.S. dollar. Recently, the greenback has been gaining against competing currencies. The better the dollar does, the worse gold is likely to perform.
Other factors may be hedge funds repositioning assets out of commodity-based investments like gold into other areas of the market that have performed poorly.
