Gold has dramatically underperformed recently, is this the new norm?
The truth is, there is nothing normal about markets or trading them. The current environment encompasses market sentiment and volatility levels, but tomorrow could be dramatically different. Accordingly, what you assume to be the “norm” won’t necessarily carry into the future.
Since posting an all-time-high in September of 2011 near $1,900, the asset class once revered as a “safe haven” has been tearing holes in investment portfolios. Just as traders and investors were willing to jump on gold’s bullish bandwagon, the speculative community has turned on the yellow metal with vengeance. Nonetheless, at the precise time gold felt most bullish a few years ago was the exact time it was topping out. We feel like the eventual bottom in gold will feel the same; the moment in which the bulls are desperate for relief and the bears are salivating for yet another new low will be the point at which a magnificent price reversal will be possible. At the time of this writing, we were assuming this scenario would be looming within the July time frame. Once the tides turn, the pain felt by the late-comer sellers, or simply market chasers, will be fierce.
If you’ve been reading this column over the years, or have followed our newsletters, webinars, etc., you are likely aware of the fact that we are not necessarily believers in the gold story. We are quick to remind investors that gold has its limitations as an investment product. It doesn’t pay a dividend or a coupon payment and, aside from the value humans place on it, it isn’t worth much. After all, it is too soft of a metal to be used for most industrial purposes. If it weren’t for our obsession with history and the gold standard, it would be just another element on the periodic table. Even so, when it comes to the financial markets perception often goes much further than reality does. Accordingly, we feel as though speculators will eventually fall back in love with the “idea” of hedging inflation and economic risk with gold.
The economy has been slowly recovering for years but has yet to show real signs of strength. Investors, and thus the markets, will be sure to question the equity market rally from time to time; this too will work in favor of the bullish gold case.