Throughout all the tumult of the past 10 years -- the bubbles, the recessions, the wars, the bank failures and the bailouts -- one asset class has outshone all others:
Gold.
From a low of $255 an ounce in the heady days of early 2001, gold now sits above $1,100, a climb of nearly 340%. It moved above $1,000 for the first time in early 2008, and it hit a peak of $1,226 in November 2009 as worries over the debt crisis in Dubai reached fever pitch and the Reserve Bank of India purchased a large block of gold from the International Monetary Fund.
Along the way, analysts breathlessly proclaimed that $2,000 gold was just around the corner.
It didn't happen.
Instead, gold started to lose its shine as a global economic recovery gained traction. Since U.S. stocks hit their low March 9, 2009, gold has underperformed the most unglamorous of all metals: Lead has gained 74% while gold is up just 21%.
So, what went wrong? And is $2,000 gold still a possibility?
Metallic, not magical
Quite simply, despite its charm and legendary allure, gold isn't immune to the laws of supply and demand.Because the metal has limited industrial use, generates no cash flow as an investment and has very price-sensitive end users in the jewelry market, gold's value depends on the swing factor of investor demand.
And, boy, did investor demand swing: According to Credit Suisse estimates, demand for gold nearly doubled between 2007 and 2009 as the credit crisis went critical and the global economy tipped into the worst recession since the 1930s. That sent gold prices climbing.
Buying gold without holding gold
The big story here was the huge increase in the popularity of gold exchange-traded funds. Gold ETFs, like all ETFs, are similar to mutual funds but bought and sold like stocks. They allow investors to quickly and painlessly diversify into gold without the transaction costs and storage expenses associated with holding physical bullion or coins.Overall, the assets of gold ETFs increased 84% in 2009 as investors sought protection from a falling U.S. dollar and economic uncertainty.
The largest, SPDR Gold Shares (GLD, news, msgs), is backed by more than $40 billion in bullion -- physical gold -- housed in vaults beneath the streets of London.
SPDR Gold Shares accounts for 62% of total gold ETF holdings, but there are alternatives. The iShares Comex Gold Trust (IAU, news, msgs) and ETFs Physical Swiss Gold Shares (SGOL, news, msgs) also hold bullion. The PowerShares DB Gold (DGL, news, msgs) and UBS E-Tracs Gold Total Return (UBG, news, msgs) ETFs hold derivative contracts tied to gold futures. All benefit if gold moves higher.
Credit Suisse Standard Securities analyst David Davis estimates that gold ETFs ended 2009 with nearly 2,000 tons of gold in their vaults. Compared with the world's central banks, gold ETFs collectively rank as the world's sixth-largest holders of bullion. They own more than China and sit on the list just behind France. Davis dubs SPDR Gold Shares and its ilk the "People's Central Bank."
| Ways to invest in gold | ||||
|---|---|---|---|---|
ETFs | Recent share price | 52-week low | 52-week high | Focus |
$107.76 | $84.92 | $119.54 | Gold bullion | |
$107.83 | $85.02 | $119.58 | Gold bullion | |
$109.83 | $98.67 | $121.86 | Gold bullion | |
$39.31 | $31.39 | $43.69 | Gold futures | |
$30.05 | $20.25 | $34.01 | Gold futures | |
$45.25 | $30.88 | $55.40 | Gold mining stocks | |
Stocks | Recent share price | 52-week low | 52-week high | Focus |
$38.57 | $26.71 | $46.24 | Gold mining in Canada, U.S. and Latin America | |
$10.18 | $7.36 | $14.37 | Gold mining in Latin America | |
$39.41 | $48.02 | $38.50 | Gold mining around the world | |
Now, with the U.S. dollar strengthening, the global economy on the mend and investor confidence on the rise, investment demand for gold has waned. Once gold crossed the emotional $1,000 barrier last year, new money coming into the gold ETFs dried up, especially from hedge funds and other institutional investors. Now, it appears these hotshot traders are heading for the exits.
The market's so-called gold bugs, whose faith in the metal never wanes, say the setback is only temporary. They point to rising government debt, runaway deficits and massive increases in the money supply as indications of a coming wave of inflation. The other alternative, in their mind, is a double-dip recession that leads to an economic depression and price deflation. Gold could be a haven under both dark scenarios.
More on their rationale in a moment. First, let's look at the other side of the immediate price equation: the supply of gold.