The price of gold can be a potentially good indicator as to the state of the economy, and this plunge may turn out to be good news.
By AARON KATSMANPure Gold exhibit 370(photo credit: TML/Dudi Saad)
Monday’s dramatic plunge in the price of gold has been the talk of the investment community.The $150 drop was, in percentage terms, the worst drop in 30 years. While gold bugs are pounding the table for investors to plow more money into the metal at these cheaper levels, others are saying that we could see $800 an ounce well before we see $2,000.A couple of years ago in this column I wrote the following: “When it comes to investing in precious metals, most investors tend to focus on gold and silver. With gold in the midst of a multiyear bull market, the yellow metal gets most of the media attention. Headlines like ‘Gold to hit $2000 an ounce’ and ‘Invest in gold to cash in on US dollar demise’ have appeared almost relentlessly over the past couple of years. While gold has been the media darling, it’s actually one of the worst-performing metals over the last year.“Rising gold prices have been less about economic fundamentals, such as rising demand, and more about speculation.For most non-day-trading investors, the last thing that you want to do is invest in a market driven by speculators. Before you know it, the speculators have moved on to some other asset, sending the value of your investment plunging, all while you are left holding the proverbial bag, without even knowing what happened.”The sky is falling While many in the investing community are lamenting the new reality vis-à-vis gold, the huge fall may come with a silver lining. This could very well be a signal that the world is not coming to an end and that the global economy may be out of the woods.Well-known economist Larry Kudlow takes this approach and says: “But I’m not buying it. I still think falling gold is a good thing. And whatever the shortterm turbulence, a more subdued price for gold (and commodities) bodes well for the future economy. There is no end-of-the-world scenario here, as there was after the financial meltdown. Nor is there an end-of-the-USdollar scenario, as many investors fear, nor an end to the euro. Nor is there any massive inflation scenario, supposedly from the Fed cranking up all those printing presses.”He continues: “The reality is that all those QE reserves from the Fed never circulated through the economy.Most of them are on deposit at the central bank. And because everyone is still risk-averse, the demand for cash is so high that the turnover, or velocity, of money keeps falling.”Energy independence Another would-be nail in the gold coffin is the US potentially becoming energy independent by the end of the decade. No, I am not getting all soft and suddenly becoming an environmentalist talking about wind and sun power powering America for the 21st century. The energy sources that will provide alternatives to crude oil going forward are natural gas and shale. Bloomberg.com quotes Reliance Industries Ltd. CEO Mukesh Ambani, who operates the largest oil refining complex in the world, saying: “For many decades, we have heard that the US will be independent of foreign imports of energy.
Realistically, I can now tell you that it is my judgment this will happen in the next five to seven years.”This energy independence, along with a strong economy and US dollar, will put continued downward pressure on gold. Now, I am not jumping up and down saying the US economy is firing on all cylinders; in fact, it’s far from that. But things are getting better economically, albeit at a snail’s pace. The price of gold can be a potentially good indicator as to the state of the economy, and this plunge may turn out to be good news. I know there is a huge problem with the debt, more and more regulation coming down the pike, stubbornly high unemployment and many other economic negatives, but despite this, gold’s plunge may be an indication that things will continue to improve.Your portfolio For investors who are still holding gold, speak to your financial adviser to analyze whether you should continue the same way. Remember, if you have bought it recently and are sitting on a loss, don’t let the infamous “I’ll wait for it to go back to the price I bought it at” philosophy be your guide. If you really believe that it will go back up, then fine. But if not, it may behoove you to sell and cut your losses.aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.
