At the peak, gold bugs – a
combination of paranoid investors and others with a fear-based political
agenda – were happily predicting gold prices going to $2,000, $3,000,
and even to $5,000 in a matter of years. But prices have moved mostly
downward since then. In April, gold was selling for close to $1,300 per
ounce – and the price is still hovering below $1400, an almost 30% drop
from the 2011 high.
There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, toward $1,000 by 2015.
First,
gold prices tend to spike when there are serious economic, financial,
and geopolitical risks in the global economy. During the global
financial crisis, even the safety of bank deposits and government bonds
was in doubt for some investors. If you worry about financial
Armageddon, it is indeed metaphorically the time to stock your bunker
with guns, ammunition, canned food, and gold bars.
But,
even in that dire scenario, gold might be a poor investment. Indeed, at
the peak of the global financial crisis in 2008 and 2009, gold prices
fell sharply a few times. In an extreme credit crunch, leveraged
purchases of gold cause forced sales, because any price correction
triggers margin calls. As a result, gold can be very volatile – upward
and downward – at the peak of a crisis.
Second,
gold performs best when there is a risk of high inflation, as its
popularity as a store of value increases. But, despite very aggressive
monetary policy by many central banks – successive rounds of
“quantitative easing” have doubled, or even tripled, the money supply in
most advanced economies – global inflation is actually low and falling
further.
