By Nick Markola, CIMA®/
For centuries, long before the beginning of the recorded history, gold has been a sought-after precious metal for coinage, jewelry, and other arts. According to the Wikipedia definition, gold is a dense, soft, shiny, malleable, and ductile metal. It is a chemical element with the symbol Au and atomic number 79. In Latin Aurum means glow of sunrise. Others believe that it means shining dawn or glowing dawn. While true origin of the name or its factual meaning can be debated, the fact that gold has made a permanent place in some investor portfolios, or holdings of Central Banks globally isn’t for much debate. Some investors have had gold in the portfolios for a long time but it appears as if the media coverage of gold has increased since the Great Recession of 2008 and early 2009. More recently, in the past few weeks, after years of steady positive returns, gold experienced a price decline not seen in the past 30 years. The double digit price decline left investors asking, is this a time to totally get out of gold, stay on the sidelines or buy.
Over the centuries, gold has been used for monetary exchange. Entries in Wikipedia explain that this was done either by issuance and recognition of gold coins or through gold convertible paper instruments by establishing gold standards in which the total value of issued money is represented in a store of gold reserves. The first gold coins of the Grecian age were struck around 700 BC. European economies re-established the minting of gold as coinage during the thirteenth and fourteenth centuries. In fact, at the beginning of World War I, the warring nations, in order to inflate their currencies and finance the war, moved to a fractional gold standard. It was not until after World War II that gold was replaced by a system of convertible currency. This was done after the Bretton Woods Conference at Bretton Woods in New Hampshire in July of 1944.
For a long time, gold has been used as an investment, however storing it for investment purposes is a challenge. Many holders of gold store it in the form of a bullion (the word bullion originates from Frecnh which meant “boiling” or melting house) coins or bars. Typically, investors hold gold as a hedge against inflation or other market declines and economic disruptions. Gold is also widely used in jewelry. This is the part that many Albanians know well, especially the young brides. As we know, in some parts, the family’s worth or status is measured by how much gold jewelry they lavish on a bride. For all the young grooms and their families, there was some good news around the 15th of this month. After rising six fold in the past 12 years, (yes, that is correct, gold rose six fold in the past 12 years) gold prices plunged 9.1% on April 15, 2013. This was the largest the largest drop in gold prices since 1983. Now the grooms and their families can save some money, with lower gold prices, in their quest to impress the bride, her family and all onlookers. Gold prices peaked and reached the all time high of $1,921.15 an ounce in September 2011. Last week, the yellow metal tumbled to its 26-month low price of $1,347.95. This is an approximately 30% drop in the price of gold from its peak, thus making it all more affordable for the young Albanian grooms to lavish and shower their brides with gold jewelry.
Many investors are scrambling how to interpret the recent decline in gold prices and are asking whether this is a good entry point or should they wait longer. Others that had not ventured in the yellow metal may have more questions about the recent price decline. One of the questions that may be on many investors and potential investors’ minds is what triggered the decline in gold prices recently. We all know that gold is a precious metal with a limited supply. According to GFMS Ltd. an independent precious metals consultant specializing in gold and based in London, only a 171,300 tons of gold have been mined in the entire human history. Gold supplies furthermore are limited and finite. The answer to the above question appears to be Cyprus. Cyprus was in the news in the past few months after they needed a financial bailout and depositors in their largest bank sustained large losses. There were subsequent reports The Central Bank of Cyprus may have to sell its gold reserves as part of the conditions to Europe’s bailout of the island. It appears that some investors may have been nervous that such a move would push the gold prices down and they did not want to take a possible hit. Some believe that this led to a rush for the exit and a chain reaction that followed probably lead to the biggest drop in gold prices in 30 years. The end result was an approximately 30% price decline in gold from its peak in September 2011. Many Central Banks took a hit as the value of their gold reserves declined significantly. For example the Reserve Bank of India saw the value of its gold reserves drop from $34 billion in September 2011 to $24 billion last week.
It remains to be seen where gold prices go from current levels. Baron’s reported that last week, hedge funds reduced by 8.2% their bets on lower gold prices, while they left the same their bets on a rally in gold prices. Some Central Banks have been vocal to argue that the drop in gold prices is a buying opportunity. However, it remains to be seen if they are putting their money where their mouth is, or whether they are just looking to support an increase in price of gold via their comments so the value of their gold reserves increases too. In any event, gold could be a diversifier in some investment portfolios. Doing your homework is key and the most important step. It is more important than playing the dangerous game of trying to predict prices. Before deciding whether you are a long term investor in gold, or just a speculator, take the time to do exhaustive homework. Who knows, the result may just surprise you.
* The writer is the Co-Founder of APEN and the President of Vatra Westchester Branch