Gold is the stuff myths are made of.
Among the myths: It is a store of value, a hedge against inflation or a hard alternative currency.
Its
behavior over recent decades suggests that it has been inconsistent in
those roles. It has done better as something simpler: a bet on fear.
Gold
rose on basic economic fears in the 2000s but fell starting in 2011 as
those fears abated. Now fears are spreading again about waning Federal
Reserve stimulus and about global growth. Gold has rebounded 11% since
mid-December.
Experienced gold analysts are warning clients to be careful: If the fears subside, the price of gold could do the same.
"Gold
goes up as an insurance policy and then it is sold at a loss when
people no longer want insurance," said Rhona O'Connell, head of metals
research and forecasts at Thomson Reuters GFMS, a research firm known
for its work on gold.
Gold
could move higher temporarily, but Ms. O'Connell says its price is
likely to have trouble making significant gains before 2016 because
economic confidence has improved.
Sameer Samana, senior international strategist at brokerage firm Wells
Fargo Advisors, suggests clients use gold's rebound to sell anything
they have left.
"What we have found in our work is that a broad
basket of commodities is a better hedge against inflation, a greater
diversification and a better hedge against the dollar," Mr. Samana said.
Gold does well "when you are very nervous about the world," he said.
He prefers copper, aluminum and zinc in a time of recovery.
Gold
differs from other investments in an important way: It isn't very
useful. Some is used for rings, watches, dental implants and electronic
connectors.
But the vast majority is hoarded as bars, coins or, in
developing countries, heavy jewelry that serves more as a protection
against disaster than an adornment.
Unlike
stock, gold doesn't offer a stake in a business's results. It doesn't
pay dividends or interest. It doesn't grow crops like farmland or
provide shelter like a building. It is useful when people are fearful
and flee to it.
Gold soared
in the 1970s amid oil crises, runaway inflation and a volatile stock
market. When the economy recovered gold collapsed.
Gold
rebounded in the troubled 2000s but peaked in 2011, the year Standard
& Poor's downgraded U.S. sovereign debt and stocks fell nearly 20%.
Economic stability since then has put a lid on gold.
Particularly disappointing, gold has never come close to returning to its 1980 record once inflation is taken into account.
Gold
futures hit a record $825.50 in New York on Jan. 21, 1980, which in
today's dollars is $2,481.98. Gold's 2011 high was $1,950.15 in today's
dollars, 27% short of a record. On Friday, gold futures closed at
$1,323.90.
Stocks have hit
inflation-adjusted records repeatedly since 1980, most recently in
December and January. Gold hasn't. It is barely halfway back to its 1980
record, taking inflation into account.
Gold
in that time has worked better as a speculative bet on fear than a
store of value. Because Western economies tend to experience more
stability than fear, gold is typically a risky holding there.
The
Permanent Portfolio, a San Francisco mutual fund that invests in bonds,
gold, stocks and foreign investments, ballooned to $17 billion a year
ago from $57 million in 2000. Now it is back to $9 billion.
Michael Cuggino, its president, says gold wasn't the only reason for
redemptions; investors have fled bonds and other conservative
investments.
Some money has returned to his fund since gold began
recovering in December.
Still,
"when people got concerned about gold in the second quarter of last
year, there were more redemptions than previously," he said. He is
optimistic about gold but sees the mentality shifting. Investors, he
said, are more concerned about returns than protection.
One
reason for gold's recent rebound is demand in China and India, where
economic worries have risen. Swiss refineries have worked overtime to
recast big bars favored by Western banks into smaller ones preferred in
Asia.
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