Melissa Sayer, a resident of Westfield, N.J., was dying to get an iPad. However, she couldn’t justify the expense of a gadget she didn’t really need, no matter how “cool” it was.
Then, in August, a friend told Sayer she should consider selling her gold jewelry.
“The price of gold was high, my friend said, and since I never wear gold—I prefer funky silver jewelry—I thought, ‘let’s just see what happens,’” she says.
She picked out some necklaces and a pin she hadn’t worn for over 10 years, threw in her high school class ring for good measure, and went down to a local jewelry store that was purchasing gold.
“[The store] bought my gold and gave me enough money to buy an iPad and a bunch of apps,” Sayer says. “I was thrilled—I felt like I got a great deal.”
Scores of people the world over who, like Sayer, have cashed in on the high gold prices, have no doubt felt the same way. Whether it’s about selling gold or buying gold, investing in gold ETFs or purchasing gold bullion as an alternative to currency, something that many central banks have been increasingly doing, the world has been caught up in the throes of a major gold rush, one that seems to have no end in sight.
On one level, that’s not surprising. Humankind has had an unconditional trust in gold and an unequivocal belief that nothing can ever diminish its worth, and in troubled times, gold has always been a safe haven for investors. The run-up in gold prices in the aftermath of the 2008–2009 financial crisis is proof of this. Even now, despite a recent market sell-off and a fall in the price of gold, the lure of this most precious of precious metals continues to attract investment dollars, and it remains the ultimate safe haven investment destination.
All the same, experts believe that the gold story may have changed slightly and that there has been a paradigm shift in how the investment world views gold. That paradigm shift will determine, they say, the direction of gold prices going forward and condition the forces that drive the price of gold up or down.
The Fear Factor Versus High Gold Prices
For the past few years, the fear factor—the extreme, all-consuming fear that governs investor attitude and investment choice—drove the price of gold to all-time highs. Gold is and always has been the ultimate investment to hedge fear, says Malcolm Gissen, founder of Malcolm H. Gissen & Associates and co-manager of the Encompass Fund (ENCPX). Even today, Gissen believes that fear is still rampant in the world. The ever-present fears over the health of the global financial system and the uncertainty over the United States and the global economy are very real, he says, and they will continue to drive the price of gold higher.
“I believe that the price of gold will continue to rise because I believe that we are still in an environment of fear,” Gissen says.
Investor fear is based upon many factors, Gissen says, but at this point in time, Congress’s inability to come to an agreement on how to deal with the country’s deficit is one of the greatest drivers of fear.
“The constant headlines that we are no doubt going to continue seeing through 2012 about the lack of compromise between our political parties will drive investor fear,” Gissen says. “We are so polarized as a nation and we have elected legislators that just don’t seem able to compromise. So long as we have complete fear, people will invest in gold, no matter how high prices are.”
According to Stephen Land, though, fear—or at any rate the deep-set, all-consuming fear of a systemic meltdown that investors had between 2008 and 2010—is not as much of a driver of gold prices as it was. Granted, the U.S. debt problem is very real, and the European sovereign crisis is still unresolved. But while investors may still be fearful of the impact of these issues, Land, the co-portfolio manager for Franklin Templeton Investments’ Franklin Natural Resources Fund (FRNRX), believes they are less worried about the direction of the financial markets and the situation of the global economy, and more concerned about the actual price of gold itself as well as the possibility of having to buy gold again at record highs. As such, balancing the fear of a systemic meltdown against fear of paying too much for gold will determine its price going forward, he says.
“This trend is new and it shows that gold has, in a sense, grown up,” Land says.
The greatest change in the gold price dynamic may well be that investors have made it clear that too much of a good thing may indeed be just that, and that there is a price level beyond which they will not pay for gold, no matter its status as the investment of last resort.
The recent dynamics of the gold trade have shown that gold can be as volatile as any other asset class, says Oliver Pursche, president of Gary Goldberg Financial Services and co-manager of the GMG Defensive Beta Fund (MPDAX). This has resulted in a realization that gold may not be as safe a haven as investors have always thought it to be.
More than that, though, investors seem to have come to the realization that a daily rise in gold prices with no fundamental valuation is unsustainable, he says.
“Too many investors were chasing gold without there being a fundamental justification for it,” Pursche says. “In the past months, gold has sold off significantly as the dynamics of investing have changed, and as painful as it has been to some, it has brought some reality to the market and a recognition that there is no such thing as the price of gold always going up. It’s hard to say what will happen going forward, but we have seen that investors will sell gold once it gets to a level where they feel the price is too much.”
Inflation: The New Fear