Ideal Conditions Provide Little Support for Gold
One of the surest signs that an investment is about to take a turn for the worst is when numerous favorable fundamental conditions are aligned and the price still struggles to gain altitude. That may be happening to gold.
As the metal's loyal followers like to point out, gold thrives when the future is seen to be perilous, or else too murky to gauge, and investors lose faith in conventional assets like stocks, bonds and paper money. In other words, times like these.
We have endured bear markets in just about everything, and economic conditions are the bleakest they have been in more than 70 years. The government seems to be trying every solution imaginable, plus a few that would have been unheard of until recently.
Most plans involve expanding the money supply, and the ones that budget mere billions of dollars, instead of trillions, have carried a presumption of inadequacy on Wall Street. That raises the likelihood of inflation down the road -- the perfect climate for gold -- but economists, politicians and investors are too concerned about today to fret about tomorrow.
It is not as though gold is being ignored. Banks that cater to wealthy private clients report strong demand, and recent reports of activity by traders in gold futures contracts show bullishness among large speculators running at close to 90 percent.
The favorable fundamental backdrop and the positive sentiment helped push gold above $1,000 an ounce for the first time ever last summer and again in February. It could not repeat the feat late last month, however, when the Federal Reserve announced that it would buy Treasury bonds in the open market to support the economy. Since then the price has fallen by nearly $100.
"Almost no single piece of news could be more bullish for gold prices than the Fed signaling that it will print money and do whatever it needs to get the economy rolling again," the latest issue of the Elliott Wave Financial Forecast said.
The fact that gold has fallen since then confirms that a firm downtrend is in place, the newsletter's editors write. More worrisome for those of us who do not own gold, they take it as an indication that powerful deflationary forces remain in the economy and threaten to cut short any recovery.
Robert Arnott, chairman of the Los Angeles asset-management firm Research Affiliates, has a more benign explanation for the lackluster performance. It stems from a newfound sense of hope among investors, in his view, or at least an alleviation of the despair that gripped the market since last summer. That makes the metal less coveted as a haven.
Arnott is more concerned about inflation than deflation, but he thinks there are better substances out there to protect against it.
"I think gold is expensive relative to other commodities," he said. "You have gold upwards of $900 and less than 15 percent away from all-time highs. Other commodities are trading at one-half to one-third of their highs. That's a daunting spread, and it makes gold a really expensive inflation hedge."
Gold tends to be too expensive for him under most backdrops. The metal "doesn't make sense as a core holding," Arnott said, because, unlike most investments, it pays no income and does not represent anything else economically useful, as stocks and bonds do. He considers it an insurance policy that doesn't pay off enough to be worth owning.
"Gold winds up being an asset that doesn't help you during good economic times, and times are good more often than they're bad," he noted. "It's easy, in times like this, to forget that."
