Gold was once seen as an investment to protect against inflation, deflation, economic turbulence and a weak dollar. The gold price trend however has undermined all this.
Something strange happened recently: legendary hedge fund manager John Paulson took on the gold mine managers. Their salaries he considered too high. He’s been sitting for more than seven years on gold investments worth billions, and has incurred big losses.
Physical gold dealers have now noted a jump in demand even as the gold price continues to slide toward the critical price level of $1,200. Private buyers may have decided this ist he time to re-enter the gold market. Institutional investors on the other hand are withdrawing from the gold index funds.
Irrational Optimism, Disillusioned Pessimism
It appears the optimism of the private investors is irrational and the pessimism emanating from the large investors like John Paulson are disillusionary. It seems as an investment class has lost all its attractions. The barren years for «gold bugs» have now lasted seven years.
Anyone who believed the qualities of gold as a safe haven and the price decline as a buying opportunity has been disappointed. Even though gold has much going for it: deflation remains an ongoing threat, which should boost demand. Central banks have flooded markets with liquidity, which in the medium- and long-term boost the threat of inflation.
Persistent False Predictions
These factors should have boosted the gold price. In addition, one political crisis after another had little impact on the gold price.
Still fans of the metal are sticking to their forecasts: devaluation and galloping inflation will push gold prices through the roof. Nothing of the sort has happened. Not even a drop a bitcoin prices has affected the price.
Investors in gold have also been irritated by the lack of gold price reaction to the burgeoning trade war between the U.S. and China. Gold analysts justify the price decline with the stronger dollar and the lack of inflation.
Uncoupled of Markets
Fact is that the gold price has increasingly decoupled itself from the financial markets and no longer functions as a price indicator. Its reputation as a «safe haven» was lost back in 2011. The result is that the gold price is driven by physical demand, while institutional investors have for a time avoided gold.
Analyst Martin Utschneider at Privatbank Donner & Reuschel told German «Manager Magazin» this week that «gold has become a purely speculative investment».
