Gold Since 2011

Over the past few weeks metals investors have been watching gold fall to levels it hasn’t touched in four years. There are signs that this long decline might be ending, leaving an opening for smart buyers to get in at a bargain price, but what can we expect in the future? Is past performance a reliable enough guide?

Looking back over the last five years, what really stands out is the heights gold reached in the late summer of 2011. Following the 2008 financial crisis many investors moved money to gold as share prices plummeted. It didn’t take long for the Dow to start regaining the lost ground – by the middle of 2009 it was back on an upward trajectory – but the recovery wasn’t robust and there were frequent dips. With all the major economies struggling to pull themselves out of recession the markets were painfully aware prices could fall back at any time, so a safe haven like gold saw strong demand. By mid-September 2011 it was trading at $1,860 per ounce and looked set to keep going to the $2,000 mark. Then, on September 23, it abruptly fell by more than $100 in a single day.

The usual reason for a sharp fall in gold – a jump in stocks – doesn’t apply here. In fact the Dow had lost nearly 500 points the day before and was showing no sign of recovery. Many analysts blame gold’s losses on the CME Group raising margin requirements by 21 percent; the previous time they did this it triggered a similar drop in gold prices. Whatever the cause there was a strong adjustment downwards, with gold falling to $1,600 by the beginning of October. It then rallied and made its way back to $1,800 by the end of that month, and fluctuated between $1,500 and $1,800 until October 2012. That’s when it started the downward trend that, hopefully, is bottoming out right now.

That trend hasn’t been an even one; there have been several points when it looked like reversing . Most of the drop happened between October 2012 and June 2013, when the spot price touched the $1,200 barrier for the first time since 2010. Then it climbed back to $1,400, dropped all the way back again by the start of this year and started climbing once more. It reached its 2014 high of $1,382 in late February and it’s been mostly downhill from there.

Overall the decline of gold can be linked to the recovery in the equities markets. Both the Dow and the FTSE 100 have been ratcheting up since 2009, and inevitably that’s going to slowly rebuild confidence in stocks. Because lack of that confidence is what drives investors to gold in the first place, as it returns they’re going to sell metals and make their way back to shares. However what we might be seeing now is the pendulum starting to swing back; the rise of equities has stumbled a couple of times recently and while the main indexes haven’t lost any ground it doesn’t look safe to assume they’re going to keep rising in the short to medium term. Gold price charts for the last two weeks seem to show more interest in a reliable hedge against a bear market, so while we don’t think gold will be back above $1,800 any time soon a return to $1,400 is a different story.