Falling out of Love with Gold

May 25, 2013

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Over the last few years, ever since the financial crisis began, the view of most investors towards gold has been extremely favorable. The logic worked as follows: First, the higher risk of a crisis creates a safe haven demand for gold. Second, loose monetary policy by central banks makes gold attractive as a hedge against inflation.

This logic has been largely unquestioned over the last few years, as gold has risen considerably. In an economic world dominated by crises, pessimism, and a belief that things were only getting worse, gold has thrived in its role as a safe haven.

What has changed now? Since making highs above $1,900 in late 2011, gold is now down nearly 30% since then. While it easy to focus on the recent correction in gold, it is important not to forget the big picture. The big picture is that since 2007, gold prices are now double what they were then.

Despite the recent fall in gold prices, gold is still up by around 100% in the last six years. That is still an excellent annual return for any investment. This is a telling statistic. It means that when gold was at its peak, it had earned a return in excess of 170%!

Think about this from an objective perspective. Throughout history, if we witness such a large gain in such a short space of time for any asset, it is almost always the case that it cannot be sustained. Time and time again, large gains like this lead to spectacular falls. It is a classic case of a financial bubble.

That does not mean that rising gold prices was not justified. What it means is that a rise of 170% is not justified. It is certainly the case that a rise of a smaller magnitude is in line with the fundamentals.

Recently, investors have turned pessimistic on gold. The sentiments in the markets and the financial press are negative towards gold. This is largely a result of the fall in the gold price rather than anything else. It is not clear whether gold's bubble has fully burst. As mentioned, gold is still up 100% in the last six years, which is also extremely high.

Warren Buffett - The Value Investor

Visit our Warren Buffett Page for a whole range of resources on the Oracle of Omaha...

Start with the Lessons from Buffett and go on to take the Quiz to see how well you know his investment style! Also, get details of books recommended by him, and access an opportunity to Invest like Buffett himself!

Get to know Buffett better! Click here...

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Falling out of Love with Gold". Click here!

3 Responses to "Falling out of Love with Gold"


May 26, 2013

If this happens to a solid assets like gold when the extreme money floating around at 0% interest pulls out. Just imagine what will happen to equity worldwide when this kind money will pull out, expect a 50% crash easily, be the smart retail investor who has kept away from equities & not been lured by the TV experts who have invested in the period before 2003 & are looking for fools to invest at the top. Stock market are a place where professionals make money at the expense of amateurs. Did you know about the conflict of interest of FM's son in the stock market?


Ramana Kumar

May 26, 2013

your stance is basically cautious, i dont see a clear recommendation to investors in either direction. one point here : gold in USD terms has indeed peaked at $1900 in sep 2011. but in Rupee terms, its a different story. this is impt becos there are some views which call for a big depreciation in the Rupee, which will make gold more attractive.


Prabal Biswas

May 26, 2013

Irrespective of the price , people will still buy gold . I don't think yellow metal will be replaced by some other metal at least for a marriage in the family purpose. So, those buy gold now will make money in 2033 if they have the holding capacity. Well, it should be a great buy at around Rs 8000 per 10 grams. What do you think?
Best regards

Equitymaster requests your view! Post a comment on "Falling out of Love with Gold". Click here!