After topping out at the 1000$ at the month of February, gold has failed to regain momentum and move up to the 1000$ target and beyond. Gold has found a solid base at the 890$ area and is currently trading at around the 920$ price. But what is next for the precious metal? Many investors had now and then expressed their disappointment from the gold latest performance as the commodity failed to trade above the 1000 dollar price.Thus the inevitable questions were raised: is gold a good trade? Can we afford to trade gold when other commodities look so much cheaper? To answer those questions we must go back and review gold function and performance in recent months and recent years as the world’s hedge.
Gold’s performance when equities are falling-To test gold effectiveness against falling equities we don’t have to go back far. The S&P 500 index which represents the 500 largest companies in the US by market capital fell about 40% in 2008.Gold on the other hand was up for the year, in fact not only it was up for the year but it was up for the eighth consecutive year. When bear Stearns collapsed gold spiked, when the Fannie and Freddie bailout accrued gold spiked. And the list just gets longer and longer as the crisis unfolds.
Gold’s value as a hedge against inflation-Back in the 1970s, when inflation in the US averaged 5% a year a high figure for a developed country , equities at the same period posted an average gain of -0.5% a year and long term treasuries a safe haven by all means posted an average gain of 1.5%. However it was gold posted an amazing 31% gain in the same period, a most respectable gain even in boom years. Gold has remained a good hedge against inflation even in recent days just before the credit claps at the end of 2008 when inflation expectations surged and oil traded above 100$ gold rose sharply. When the crisis erupted and inflation turned to into deflation, it was only gold that was up for the year. In fact of the 17 commodities most commonly monitored gold was the only commodity that was up.
The conclusion we must draw from those concrete examples whether they accrued twenty years ago our just last year is that when ever we fear market stability is at risk wither its inflation, deflation, falling equities or just fear itself, it is gold we trust and the market turns to. For those how ask themselves, if they can afford to trade gold when equities and other commodities trade so low we say:
Can you afford not to trade gold?
In Gold We Trust
