In the first half of 2013 many critics, pundits and similar jumped on the wagon that the gold bubble had finally popped and was headed for a drastic drop. Many were prognosticating the days of gold going back down to $400 to $700 an ounce were clearly on their way back and the landslide of valuation loss would be complete within a few weeks. That was in April 2013 (http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx). It is now almost three-fourths of the way through the year and by August 2013 gold is now look like it is making a slow but repeat comeback to former heights. For investors who stayed put despite the dire warnings, this is a good thing. However, for those on the sidelines, the question again comes up, is it a good time to get into the precious metal?
Federal Reserve Impacts
Like any investment, it’s important to understand again what is driving gold up in value. Remember, this is a precious metal whose value is entirely based on perception. Gold doesn’t produce anything, it’s not a company, and it doesn’t create dividends. Its only value comes from what people inherently think the metal is worth to them. However, it has historically been used as an inflation hedge because the metal has no linkage to any government currency.
So, given the above, gold in August 2013 is probably rising due to a number of issues, most notably the weakening of government support of the market. Keep in mind, the precious metal’s valuation was headed downside for most of the early half of the year. Gold did not trough until it broke the $1,200 mark downward in late June 2013 (http://money.cnn.com/2013/06/05/investing/gold-silver/index.html). Then buyers started coming back in, pushing the figure back up above $1,380 in August, which already represents a rough 15 percent gain in value since the low point.
Much of the downward pressure was first due to a major player move, and then came the unwinding of other investors. The gold market is not very big; in fact the amount available to the open market only represents 2 percent of the gold available in the world. So if a major investor buys or sells a big chunk, the activity can cause a noticeable swing in value. This is what occurred in April 2013. Then other investors panicked and started selling their positions as well. Additionally, the stock market was performing very well, and investors as well as funds were looking to unwind their money to get back into equities while the going was good. This carried the gold valuation drop right into June, and a valuation loss of $56 billion.
However, in July 2013 the Federal Reserve made it clear to the markets that the days of continuing to support the weak economy were coming to an end, at least under the current model (http://www.bloomberg.com/news/2013-08-19/gold-advances-to-two-month-high-on-investment-physical-demand.html). Since 2009, the Reserve has been regularly buying mortgage-backed securities off of weak banks and lenders’ portfolios, to the tune of $2 trillion. This in turn has injected cash into the economy and allowed lenders to extend credit again, generating new business and spending. The Reserve noticed that it would soon begin tapering the MBS purchasing in a divesting processing that would gradually occur through 2014. The beginning date of this tapering, however, was left unspecified.
The Federal Reserve’s effect on the market was an immediate and cold wet towel in the face. Mortgage rates jumped a full point, the stock market skidded, and people suddenly started worrying again about where the economy was going. That in turn put gold back in the driver’s seat as being a proper hedge against economic slowdown. Ergo, pressure for gold to rise again in July 2013.
Another issue that is still out in the wild lands and has the potential to cause market havoc continues to be the financial status of Europe. While France has recently announced it is free and clear of the global recession in August 2013, the European Union is still bleeding loans and support funding to its weaker partners such as Greece, Italy, Spain, and Portugal. Greece, for example, just qualified for yet another bailout loan upon loans to keep the country’s government operating, the actual approval of which is now being debated (http://www.reuters.com/article/2013/08/21/us-greece-bailout-idUSBRE97K0A820130821). Germany and France continue to be the main bankrollers. Further, many of the austerity measures the European Union lenders have put on countries have forced those governments to start restricting their people’s assets and banking (http://www.csmonitor.com/Business/The-Adam-Smith-Institute-Blog/2011/0102/European-nations-begin-seizing-private-pensions). All of these dynamics continue to make gold attractive because, again, it has no restrictive ties to a particular currency or government. Further, it’s hard to regulate physical gold holdings.
Asia is a Wildcard
A third pressure that until 2013 was helping gold was Asian investors. Buyers in both China and India were making sizable investments in gold, creating a world wave of demand for the precious metal. However, that international demand also slowed down in 2013, with investor purchasing decreasing dramatically in the first half of the year. While the Federal Reserve could extend its start date out, and Europe could stay calm, the gold purchasing demand from Asia is disconnected from the other two and remains a bit unpredictable. Many expected Asia to offset losses in June 2013, but that didn’t happen as planned (http://in.reuters.com/article/2013/06/25/asiagold-demand-idINDEE95O09E20130625).
Both countries are going through a maturity stage in their emerging markets. Labor costs have gone up, things are not as cheap anymore, and lending is tightening. As a result, spending is slowing down as well. If China in particular doesn’t kick into high gear again in consumption of resources, the likelihood of gold demand from Asia picking up is slim.
So to answer the question on whether it’s a good time to get into gold, the answer is – maybe, maybe not. Gold is at a crossroads. The April drop was clearly a retraction and correction, which gold has experienced a number of times on its way to $1,800 an ounce. Should the U.S. economy falter again, gold will definitely skyrocket. However, if things pick up, as many experts believe is occurring, gold will likely stay under the $1,450 range for the rest of the year. Marginal profits are possible, but so is a loss back to $1,200 as well.