On Monday, the price of gold briefly fell to $1080 per ounce, which is the lowest price it has seen in 5 years. As of today, it still hasn’t returned to its previous level. This devastating crash, coupled with the downward trend that gold has seen in recent years, has left investors questioning the long-term fundamentals of gold. It wasn’t that long ago that gold sellers were promising nothing but gains for the foreseeable future, so it’s understandable that some folks would be skeptical of gold’s future.
However, I think there’s an easy way to tell where gold is going long-term, and it has to do with gold’s status as a safe haven asset. Obviously, with the value of the dollar going up relative to other currencies, American investors have been ditching gold. Many of them trust the economy, and don’t feel the need to put their money in a safe haven. However, the dollar isn’t the only asset whose value has an inverse relationship with gold. You should also take note of its relationship with the stock market.
Since most people believe (falsely I might add) that the stock market is indicative of the health of an economy, it too moves in the opposite direction of gold. Take a look at the price of gold over the past 30 years.
I’ve marked too very important moments in gold’s recent history. The red square is when it was at its lowest price in 2000, and the black square is where it was at its highest in 2012. Now take a look at where the stock market was at during those years.
As you can plainly see, gold was its lowest at the peak of the dotcom bubble, when the stock market had first reached such an absurd height. Gold continued to climb through the housing bubble, and its subsequent bust. It reached its peak at the same time that the stock market fully recovered from the crash of 2008 and 2009. The price of gold hasn’t stopped dropping while at the same time, NASDAQ hasn’t stopped climbing. Once everyone thought that the economy had recovered, they started to ditch gold, and haven’t stopped since.
Market pundits are very busy right now, debating the causes of gold’s recent crash, but they’re largely ignoring gold’s macro trends. It goes up when the dollar stinks and the stock market crashes, and it goes down when those forces recover.
So if you’re interested in gold, there’s really only one thing you need to consider. Are the current market forces sustainable? If you think that the dollar is stable and the stock market will continue to climb, or at the very least, won’t have any significant crashes, then gold isn’t for you.
But if you think that the dollar’s current value is unsustainable, and you have doubts about a stock market that has surpassed the heights of the dotcom years, then now is an excellent time to buy. Its price may have more room to fall, but once our bubble economy bursts, there is one asset that every investor will covet.