Gold Goes Up, Gold Goes Down: Is It Worth Investing?

First down then up, there are good reasons for buying or selling
By Heide B. Malhotra
Heide B. Malhotra
Heide B. Malhotra
August 29, 2013 Updated: August 29, 2013

To own gold or not still divides investors because of the starkly differing views. Some investment advisers expect gold prices to move to an all-time high. Others take the cautious approach, telling customers to hold off. 

Gold “is a trade, not an investment and not something I recommend for those of you looking to buy into the recent lower prices as protection against inflation/revolution/political upheaval/debt crises/currency wars/etc.,” advised Cody Willard a former hedge fund manager in an article on Market Watch. 

According to Warren E. Buffett, chairman of Berkshire Hathaway, gold has two major shortcomings that should make an investor think hard before buying gold. According to 2011 letter Buffett stated to stockholders that gold has limited industrial use, has no intrinsic value, and no particular productive use. 

For example, Buffett believes that owning stock in a company would result in dividend earnings, providing wealth for the stockholder. On the other hand, one ounce of gold does not earn any dividend for the investor and doesn’t grow in size.

Yet, gold still has staunch supporters, who also have good arguments. Analysts at U.S. Global Investors argue gold has fallen sharply below its true value, but the trend will reverse and prices will go up. 

Comparing the price of one ounce of gold to global central bank money, the gold price should be closer to $1,780 per ounce, according to an article by U.S. Global Investors in their “Frank Talk” column. 

Since the publication of the column, gold has been on the rise. One ounce of gold cost $1, 417.50 on Aug. 27, 2013, up from the 2013 low of $1,192 on June 28. 

April Shift in Investor Sentiment

In 2013, the gold price dropped sharply from $1,535.50 per ounce of gold on April 12 to $1,395 by April 15. 

According to the World Gold Council (WGC), a research firm that focuses on the global gold market, U.S. investor sentiment drove the drop in the gold price. This affected the futures and gold-backed exchange-traded fund (ETF) market. An ETF is an open-ended investment fund, which can hold stocks, commodities, and bonds but trades like a stock on the open market. 

Western investors sold gold ETFs to the tune of 350 tons by the end of April, a 12.9 percent reduction. U.S. investors in mutual funds, hedge funds, and other funds were responsible for 75 percent (262.5 tons) of the outflow. 

They sold on positive information coming out of the U.S. Federal Reserve (Fed), including improvement of the U.S. economy and a possible slowdown of the U.S. quantitative easing (QE) program. 

Unloading Gold

Even some of the original gold bugs in the hedge fund community reduced their holdings. 

According to the MarketPulseFX website, Paulson & Co., one of the largest investor in the Spider Gold Trust ETF, decreased its holdings from 21.8 million to 10.2 million between April and June. 

“Billionaire hedge fund manager John Paulson, who told investors as recently as last month that they should own gold, cut his holdings in the metal by more than half as prices plunged into a bear market,” the MarketPulseFX article said. 

Soros Fund Management LLC, owned by billionaire George Soros, liquidated its SPDR Gold Trust holdings, selling the remainder of 530,900 shares during the past months, according to an article on the Hard Assets Investor website.

Long Term Drivers 

U.S. investors in gold appear to be driven by positive or negative economic information coming from the Fed. Lately, some investors have abandoned gold in favor of stocks. Gold investment gurus suggest this year’s unloading of gold was because the Fed indicated it would slow down QE. If the Fed follows through on its chatter, the need to hedge against inflation is reduced.

Inflation is an important factor driving gold’s price. “High inflation is fairly disruptive, and [inflation] expectations dictate consumers’ purchasing power,” states a recent report from WGC. 

In the past, U.S. interest rates also had an effect on gold purchases. If rates are low, the interest income forgone by owning gold’s goes down, making it relatively more attractive. 

Buying or not buying gold continues to baffle existing or potential investors. If gold is a commodity, but also a monetary metal with a key role in the international monetary system, uncorrelated to other traditional assets, such as stocks or bonds. 

Despite its recent price swings, the WGC sees the long-term trend of rising prices continue: “The outlook for the remainder of 2013 is even more positive. … Even if ETF outflows continue, it is quite likely that gold previously held in the ETFs will find its way to Asian consumers taking a long-term view on gold.”

Heide B. Malhotra
Heide B. Malhotra