As the stock market hits record highs, gold prices continue to fall. A review of gold prices throughout history show that this trend will probably continue. Was commodities trader George Soros right when he said “Gold is the ultimate bubble”? Were high prices in 2011 just a sign of an asset bubble? If so, how far will prices fall?
Since President Nixon took America off the gold standard in 1973, investors have bought gold for three reasons:
- To hedge against inflation.
- As a safe haven against economic uncertainty.
- To hedge against stock market declines.
In 2011, gold reached an all-time high of $1,895 an ounce as investors became concerned that Congress would not raise the debt ceiling, and the U.S. would default on its debt. In fact, gold was in a bull market since 2000, as investors reacted to the Y2K crisis (1999), the bursting of the stock market tech bubble (2000), 9/11 (2001), the dollar decline (2002-2006), the 2008 financial crisis, and the uncertainty surrounding Obamacare in the midst of a slow-growing recovery.
However, much of this uncertainty has been removed, as economic growth has stabilized around 2-2.5%, the stock market hits new record highs, and Washington seems to be in a state of gridlock. History before 2000 shows us that, as the stock market rises, gold prices fall. There hasn’t been a threat of inflation above 4% since 1990. In other words, investors have no compelling reason to buy gold.
What It Means to You
From 1979 – 2004 gold prices rarely rose above $500 an ounce. The rise to recent record-highs was a result of the worst recession since the great depression, and its after-effects. Now that things have stabilized, it wouldn’t surprise me in the least if gold returns to that historical level, or at least below $1,000 an ounce. I’m an economic analyst, not a financial planner. However, most of them advise that gold be 10% or less of a well-diversified portfolio. If you’re holding more than that now, I’d suggest you talk to your financial advisor before gold drops further. For more on what the research shows, see Why Invest in Gold.
- Should I Buy Gold?
- Should the U.S. Return to the Gold Standard?
- Do You Think Buying Gold Is a Good Strategy?
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