A few nights later, you hear noises downstairs, and you see several burglars hauling off your possessions. Fang is pointing the robbers in the direction of your silverware.
Naturally, you're a bit disappointed in Fang and his inability to live up to his name.
Gold investors may be having their Fang moment now.
After all, gold is supposed to be the great defense against currency collapse because gold is the ultimate currency. So when the U.S. is on the brink of defaulting on its debt, sending interest rates soaring and the dollar plunging, gold would logically be the portfolio defender of choice. But it hasn't been -- and not for a lack of being affordable. The price of the precious metal is more than 40% off its 2011 peak. What gives?
Quite a lot, actually. First, here's the general rationale for investing in gold. The yellow commodity has been used as money since the Scythians discovered that it's rare, universally valued and easily portable. That was about 3,000 years ago. In more modern times, gold has gained in value when paper money seemed questionable. During the Civil War, for example, gold rose on Confederate victories and fell on Union gains.
You would think, then, that the threat of a government default would send gold soaring. In default, after all, those who normally buy government debt would flee, driving down the value of U.S. currency on foreign markets. But gold is doing little to aid your portfolio.
The Dow Jones industrial average's most recent peak was on Sept. 18, when the market began to sense that a government shutdown — and possibly a default — was actually possible. On that day, the Dow stood at 15,677. By Wednesday, the Dow had fallen to 14,803, a 5.6% decline.
Gold stood at $1,301 on Sept. 18, an! d closed Wednesday at $1,304 — a 0.2% gain. (On Thursday, the Dow rallied 323 points to 15,126 on news of a possible resolution of the debt-limit stalemate, while gold swooned $10.30 an ounce).
"Honestly, it doesn't make sense," says Dan Denbow, manager of USAA Precious Metals fund. "The current situation is a bit perplexing."
And how. Francisco Blanch, head of commodities and derivatives research at Bank of America, explains that gold investors have been bitten by three short-term factors and three long-term ones. In the short term, he says, are these price drivers:
• A stinky bear market. Gold peaked at $1,895 an ounce in August 2011, according to Kitco.com. Measuring from Wednesday's close of $1,304, that's a 31% loss. "Investors have lost a lot of patience with it," Blanch says. Investors count for about half the demand for gold, with the remainder taken up by jewelry and industry. "If you're missing the investor, you have a large hole to fill."
•Poor fundamentals. Gold tends to do well when the dollar declines in value, but the dollar has held up well. That's partly because financial and economic problems elsewhere in the world have made the dollar the lesser of many evils. And interest rates, adjusted for inflation, are higher, making gold, which has no earnings and pays no interest, less attractive. The yield on the bellwether 10-year Treasury note was 1.4% in July 2012, and inflation was also 1.4% — essentially, a zero real interest rate. Currently, the 10-year T-note yields 2.68%, and inflation is 1.5% — a positive real interest rate.
•Weak commodity prices. Gold and the price of other commodities track each other fairly closely. In a relatively weak global economy, where Europe continues to struggle and China's rapid-fire growth has cooled, demand has been slack.
Those are the short-term problems with gold. In the longer term, gold has headwinds, too.
•A strong economy. Yes, gross domestic product has only been growing at a 1.6% annual ! pace the ! most recent 12 months. But think of what it has had thrown at it, Blanch says. The fiscal cliff! Sequestration! Government shutdown! "Investors are saying, 'Hold on a second. The U.S. is strong enough to experience shock after fiscal shock and still deliver a couple points of GDP growth — what do I need gold for?'"
•Monetary tightening. A key argument for gold has been that loose monetary policy — abnormally low interest rates and the Fed's bond-buying program — would ignite inflation. And, in fact, the Fed has been easing monetary policy for more than 30 years, ever since the key Fed funds rate peaked at 20% in 1981. With Fed funds at zero, however, there's nowhere to go but up as GDP keeps growing and the unemployment rate keeps falling.
•Lower trade deficit. "The public overspent 40% of its income the past 10 years on oil and Chinese gadgets," Blanch says. Now, however, things are changing. The U.S. has greatly reduced its dependence on foreign energy. "We're paying $3.50 per million BTUs for natural gas, when Europe is paying $10 to $12, and Japan is paying $15 to $18," Blanch says. "It's cheaper to manufacture things in the U.S., Mexico and China."
What does gold have going for it? It's cheap, nearly a third off its recent highs. Gold did hit a high of $850 an ounce in 1980. Adjusted for inflation, that would put gold at about $2,400. But that was the blow-off peak price. Gold averaged $612 an ounce in 1980, putting its inflation-adjusted average in a bull market year at about $1,700.
If you assume -- as many gold bugs do -- that gold reflects inflation expectations already, and that there's no reason to adjust the price for inflation, the current level isn't a bargain at all. The average price of gold since Sept. 30, 1975, has been about $500.
A swooning gold price isn't the worst thing in the world. Gold rises when things are bad. "What's good for Uncle Sam and the general public is bad for gold," says Blanch.
It doesn't hurt to own a bit of gold. "Yo! u have to! remember why you own it," Denbow says. "You own it for moments when things are not going well, such as an inflationary breakout." Right now, the dogs of gold just aren't barking.
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