The Golden Rule
Admittedly, these queries were fueled by an endless number of late-night infomercials as well as by radio talk show hosts like Glenn Beck and Sean Hannity, and even politicians like Ron Paul, who were constantly banging the gold drum. Their rationales (aside from the endorsement deals for the infomercial folks) was that the Federal Reserve's aggressive monetary policies would devalue the U.S. dollar and ultimately create inflation down the road. Since gold is denominated in dollars, as each dollar becomes less valuable, it takes more of them to purchase an ounce of gold, which drives up the value of gold.
As a former gold options trader, I have been watching from the sidelines, amused to see gold's rise and now subsequent fall. When I was trading, nobody really cared about gold -- it was a decidedly uncool asset class, because the main purpose of buying gold back then was to protect against future inflation. With little inflation in sight, gold prices were sinking when I left the floor of the Commodities Exchange in New York in the early '90s.
I reconnected with gold in early 2000, when a commodities trader I knew told me that "big-time, new money from Asia is flowing into the market" and that many of these buyers wanted to purchase hard assets with their newfound wealth. It suddenly dawned on me that these new gold buyers were not buying gold as an inflation hedge (many other products to protect against inflation came to the market in the decade after I left the floor) but rather as a way to buy a tiny piece of security in an insecure world. Thus, the 12-year bull market in gold began.
I purchased a small gold position (5 percent) in some of my clients' accounts right after the tech bubble burst, because I liked the concept of buying a small insurance policy in a crazy world. Notice I say small position, because any more than just a dollop of gold would be far too volatile for most investors. (For the record, I held the gold position until I left the firm in early 2009 and have no idea what the subsequent CIO did with it.)
During the financial crisis and its aftermath, gold became the go-to safe haven and kept climbing as nervous investors jumped from one worry (the euro zone's precarious state) to the next (the U.S. government's debt downgrade). The precious metal hit historic highs in 2011 before starting to retreat. By the end of last year, gold was trading at $1,662, even though the fiercest gold bugs still stuck to their guns, seeking even loftier levels.
What happened to gold in the second quarter of this year is a commodity wipe out like I have never seen before. One by one, the reasons why investors were flocking to gold seemed to melt away. Europe pulled back from the precipice of financial disaster and appeared to stabilize; Chinese and Indian purchasers disappeared as their local economies cooled; there was scant evidence of inflation in most of the developed world, and in fact, risks were tilting towards deflation; and the U.S. dollar strengthened after Ben Bernanke said that the Fed would taper its monthly purchase of bonds as the economy improved.
Is this just a pull back before the next bull rush in gold? Time will tell, but for now, investors have lost their luster for the shiny stuff. My advice as always is to avoid buying too much of anything that is advertised on late-night television.
(Jill Schlesinger, CFP, is the Emmy-nominated, Senior Business Analyst for CBS News. A former options trader and CIO of an investment advisory firm, Jill covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." She welcomes comments and questions at firstname.lastname@example.org.)