The price of gold has declined about 20 percent from its peak. Goldman Sachs warned that the retreat in gold was accelerating after the longest rally in nine decades. It has come as a shock to many investors, who imagine that gold is the safest asset.
Why is gold plunging? There are a lot of theories in the market. Some said that global inflation is falling, reducing gold’s value as a hedge against rising prices. According to the JPMorgan Chase’s (JPM) global consumer price index, global inflation peaked at 4 percent in 2011 and has fallen steadily since. However, for ordinary people who are still struggling to make ends meet, it seems hard to believe that inflation is over.
The other explanation is that the stock markets have risen. Money managers have clearly grown tired of the financial crisis. Investors have regained confidence in the stock markets. Expecting gold to rise at the same time would be illogical. Gold prices tend to be whipsawed by speculation more than other commodity prices are. The price of gold might have overshot due to the need of self preservation at a time of crisis. After a full decade of year-on-year gains, I would say the price of gold is returning to normal.
Anybody who did some buying before this big drop is probably in some pain. Nonetheless, there are still gold lovers who embrace this falling as a golden opportunity to increase their possessions of gold, for instance Chinese and quite a number of Asian peoples. Rumor has it that Chinese mothers will eventually beat Wall Street hedge fund managers in forcing a turnaround in the price of gold.
Regardless, in reviewing your position in gold, remind yourself why you got into gold in the first place or why you need to get in now. Is there short term benefit? Has the long term picture changed? Beware of panic selling, but watch out for over stocking as well. I don’t believe the financial crisis is done, but I don’t believe it can get any worse in recent years either.