Does gold have a future?
As I write this, gold spot price is being quoted at around $1,095 per ounce. The peak about three years ago was around $1,800 per ounce. Gold bulls, such as yours truly, have been wrong for three years. Many bulls are frustrated and are ready to give up. Of course, capitulation on the part of remaining bulls will always mark a true bottom in any asset price. It is very evident that gold is the anti-dollar. Things are always clearer after the fact.
Between 2002 and 2008, the dollar depreciated against a broad basket of currencies. Gold rallied and reached around $1,000 per ounce. Then, as the crisis struck, investors actually took refuge in the dollar. Gold fell briefly. Once the US Federal Reserve announced that it was cutting rates to zero and was going to print money to buy assets, gold resumed its rise. In fact, that probably was the last hurrah of the gold bubble, in hindsight. Had gold peaked at around $1,200 to $1,400 per ounce in 2012, its fall since then might not have been so hard to swallow for gold bulls. However, gold went all the way to $1,800. So did other commodities. That turned out to be the peak. What has happened since then, for commodities in general and for gold in particular, is interesting. Since 2012, the broad trade-weighted dollar index began a slow uptrend. It has gained around 20%.
The reasons are not hard to seek. First, the US economy avoided a recession that looked almost real in 2012. Second, the Bank of Japan (BoJ) announced a very aggressive round of asset purchases in 2013. Thus began the sharp and substantial depreciation of the yen. Third, last year, the European Central Bank (ECB) announced that it was joining the fray and printing euros at will. Finally, the euro began to lose ground against the dollar. Since these two currencies are substantially weighted in any dollar index, the recovery of the dollar trade-weighted basket has been a foregone conclusion. Now, what is interesting about it is this. The aggressive expansion of their balance sheets by the BoJ and the ECB did not cause the price of gold to recover. It was the potential collapse of the dollar and lack of confidence about the US economy that kept the price of gold aloft up to 2012. In other words, gold is anti-dollar and not anti-paper currency or anti-fiat money. Hence, as long as there is confidence in the US, its leadership of the world economy and in its currency, it will be difficult for gold to dust itself off the floor. Ironically, money-printing by the BoJ and the ECB have bolstered the "there is no alternative" argument in favour of the dollar. Now that it has become a familiar sight and routine for China to pump more money at every sign of real or perceived stress in its economy and markets, investors are right to trust the dollar more than they trust other currencies.
There is another factor that kept the party going for gold bulls (including yours truly). That was the rise in global risk perceptions from 2010 until 2012. First, the recovery from the crisis of 2008 was slow and uneven. The American economy, for example, was losing jobs until mid-2009. Then, in 2010, the Greek crisis erupted and it was joined by other countries in southern Europe. Bond yields in Spain, Portugal and Italy soared as did the cost of protection against default by these countries on their debts. Investors were nervous. However, since 2012, those fears have receded. There were occasional and fleeting bouts of volatility and fright. But, nothing more than that. Even the most recent turmoil in Europe that raised fears of a fracture in the euro zone did not succeed in rattling investors. Bond prices in Spain, Portugal and Italy held up rather well.
A less charitable way describing investor behaviour is that complacency is high and unshaken. Does it mean that gold bulls must lick their wounds and retreat? Well, I am not throwing in the towel yet. It is always the darkest before dawn. Indices of volatility and investor uncertainty in US stocks have fallen below levels seen before they bottomed and erupted in 2007. The Federal Reserve looks set to raise the federal funds rate in September. Its goal, perhaps, is to get to 1% by end of next year. By then, both the stock market and the economy cycle will have lasted far longer than historical averages indicate.