It is difficult to predict where the bottom is but the last time gold dropped this much it took over 25 years to recover. It certainly diminishes the importance of identifying the bottom even if the bottom has been reached.
Gold would need to drop another 40% from current levels in order to match the 1981-82 drawdown, so it wouldn’t be surprising to see gold fall further. Investors need to look to underpinning fundamentals again to understand gold. Poor economic data from China, inflation under control, low interest rates plus gold’s diminished status of a safe haven are not promising. Investors continue to flee as evidenced by recent record outflows. If interest rates rise again that may help gold futures since the collateral return increases but there may be outflows in lieu of income producing securities.
Since most single factors like inflation, interest rates, jewelry demand, oil prices, geopolitics and U.S. dollar strength don’t alone move gold, they are unreliable indicators of gold’s prices. However, one statistic that is pretty solid through time is that gold is uncorrelated to the stock market. On average, the 12- month correlation is zero but even on short intervals of rolling 90 days the correlation doesn’t ever exceed 0.6.
Once again, timing gold doesn’t necessarily matter. Gold is not always owned for high returns but instead serves to protect against a drop in other assets like stocks. It has held up in times of inflation and may hedge against other risks like geopolitical risk that hurts stocks. Investors looking for diversification and capital preservation may use gold in a portfolio framework at any time. Now is as good of a time as any to invest in gold given its recent drawdown and the strong stock market performance over the past several years.
Again, we’d love to hear your thoughts. Do you think now is the right time to buy gold? Or do you agree with the comment above that it’s too early to buy gold?
This article was written by Jodie Gunzberg, global head of commodities, S&P Down Jones Indices.
© S&P Dow Jones Indices LLC 2013. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to SPDJI. This material is reproduced with the prior written consent of SPDJI. For more information on SPDJI, visit http://www.spdji.com