Whatever Happened to $2,000 Gold?

Not so long ago, the price of gold was soaring, and analysts predicted $2,000 an ounce was imminent. What stopped gold's rise? Will it take off again?

Throughout all the tumult of the past 10 years -- the bubbles, the recessions, the wars, the bank failures and the bailouts -- one asset class has outshone all others:

Gold.

Best ways to buy gold

Along the way, analysts breathlessly proclaimed that $2,000 gold was just around the corner.

It didn't happen.

Instead, gold started to lose its shine as a global economic recovery gained traction. Since U.S. stocks hit their low March 9, 2009, gold has underperformed the most unglamorous of all metals: Lead has gained 74% while gold is up just 21%.

So, what went wrong? And is $2,000 gold still a possibility?Metallic, not magical Quite simply, despite its charm and legendary allure, gold isn't immune to the laws of supply and demand.

Because the metal has limited industrial use, generates no cash flow as an investment and has very price-sensitive end users in the jewelry market, gold's value depends on the swing factor of investor demand. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids= 0e523eff-0572-4693-ac1d-19e3338832a3,7456d471-b651-427c-a01e-ee0c2c3ce98f,916ae66a-bafa-4152-90df-1c225a8b6f5b,e4a805da-8b00-476e-8a05-33d88674b7c8,96851014-da76-4c19-a30b-a1c039dfd782,a20f05ec-ec2f-4d08-af84-ca5f655f615d,3612d881-e6a6-4c59-9b2a-8db7c9a89fe4", "player.fr": "iv2_en-us_money_article_Investing-MutualFunds-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=0e523eff-0572-4693-ac1d-19e3338832a3,7456d471-b651-427c-a01e-ee0c2c3ce98f,916ae66a-bafa-4152-90df-1c225a8b6f5b,e4a805da-8b00-476e-8a05-33d88674b7c8,96851014-da76-4c19-a30b-a1c039dfd782,a20f05ec-ec2f-4d08-af84-ca5f655f615d,3612d881-e6a6-4c59-9b2a-8db7c9a89fe4;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');And that is tied to gold's status as a "safe haven" asset that won't lose value to inflation the way paper currency does -- and that will still have value should economic Armageddon make credit cards and dollar bills worth as little as the plastic and linen they're made from.

And, boy, did investor demand swing: According to Credit Suisse estimates, demand for gold nearly doubled between 2007 and 2009 as the credit crisis went critical and the global economy tipped into the worst recession since the 1930s. That sent gold prices climbing.Buying gold without holding gold The big story here was the huge increase in the popularity of gold exchange-traded funds. Gold ETFs, like all ETFs, are similar to mutual funds but bought and sold like stocks. They allow investors to quickly and painlessly diversify into gold without the transaction costs and storage expenses associated with holding physical bullion or coins.

Overall, the assets of gold ETFs increased 84% in 2009 as investors sought protection from a falling U.S. dollar and economic uncertainty.

The largest, SPDR Gold Shares (GLD, news, msgs), is backed by more than $40 billion in bullion -- physical gold -- housed in vaults beneath the streets of London.

SPDR Gold Shares accounts for 62% of total gold ETF holdings, but there are alternatives. The iShares Comex Gold Trust (IAU, news, msgs) and ETFs Physical Swiss Gold Shares (SGOL, news, msgs) also hold bullion. The PowerShares DB Gold (DGL, news, msgs) and UBS E-Tracs Gold Total Return (UBG, news, msgs) ETFs hold derivative contracts tied to gold futures. All benefit if gold moves higher.

Credit Suisse Standard Securities analyst David Davis estimates that gold ETFs ended 2009 with nearly 2,000 tons of gold in their vaults. Compared with the world's central banks, gold ETFs collectively rank as the world's sixth-largest holders of bullion. They own more than China and sit on the list just behind France. Davis dubs SPDR Gold Shares and its ilk the "People's Central Bank."

 Ways to invest in gold

ETFs

Recent share price

52-week low

52-week high

Focus

Gold Trust SPDR (GLD, news, msgs)

$107.76

$84.92

$119.54

Gold bullion

iShares Gold Trust (IAU, news, msgs)

$107.83

$85.02

$119.58

Gold bullion

ETFs Physical Swiss Gold Shares (SGOL, news, msgs)

$109.83

$98.67

$121.86

Gold bullion

PowerShares DB Gold Fund (DGL, news, msgs)

$39.31

$31.39

$43.69

Gold futures

UBS E-Tracs Gold Total Return (UBG, news, msgs)

$30.05

$20.25

$34.01

Gold futures

Market Vectors Gold Miners (GDX, news, msgs)

$45.25

$30.88

$55.40

Gold mining stocks

Stocks

Recent share price

52-week low

52-week high

Focus

Goldcorp (GG, news, msgs)

$38.57

$26.71

$46.24

Gold mining in Canada, U.S. and Latin America

Yamana Gold (AUY, news, msgs)

$10.18

$7.36

$14.37

Gold mining in Latin America

Barrick Gold (ABX, news, msgs)

$39.41

$48.02

$38.50

Gold mining around the world

Now, with the U.S. dollar strengthening, the global economy on the mend and investor confidence on the rise, investment demand for gold has waned. Once gold crossed the emotional $1,000 barrier last year, new money coming into the gold ETFs dried up, especially from hedge funds and other institutional investors. Now, it appears these hotshot traders are heading for the exits.

The market's so-called gold bugs, whose faith in the metal never wanes, say the setback is only temporary. They point to rising government debt, runaway deficits and massive increases in the money supply as indications of a coming wave of inflation. The other alternative, in their mind, is a double-dip recession that leads to an economic depression and price deflation. Gold could be a haven under both dark scenarios.

More on their rationale in a moment. First, let's look at the other side of the immediate price equation: the supply of gold.

Continued: Supply surplusMore from MSN Money

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One thing to be careful of.  If you believe that gold will rise due to the devaluation of fiat currencies as nations around the world engage in large-scale money-printing.

 

It is very plausible that this will not really ramp up for a couple of years.  however, markets are anticipatory so it is possible that gold would rise simply on anticipation of monetary inflation even if the actual inflation may take several years to start really showing up.

ReplyReport Abuselsjogren #3Tuesday, March 23, 2010 9:43:25 PM

As to gold bugs:  Anyone who ALWAYS believes gold to be a good investment is a fool.

 

However, when you have precious metals cycles that run for a couple decades, just because someone is bullish on gold for a very long period of time, let's say 20 years, doesn't mean they are a gold bug. 

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And, boy, did investor demand swing: According to Credit Suisse estimates, demand for gold nearly doubled between 2007 and 2009 as the credit crisis went critical and the global economy tipped into the worst recession since the 1930s. That sent gold prices climbing.Buying gold without holding gold The big story here was the huge increase in the popularity of gold exchange-traded funds. Gold ETFs, like all ETFs, are similar to mutual funds but bought and sold like stocks. They allow investors to quickly and painlessly diversify into gold without the transaction costs and storage expenses associated with holding physical bullion or coins.

Overall, the assets of gold ETFs increased 84% in 2009 as investors sought protection from a falling U.S. dollar and economic uncertainty.

The largest, SPDR Gold Shares (GLD, news, msgs), is backed by more than $40 billion in bullion -- physical gold -- housed in vaults beneath the streets of London.

SPDR Gold Shares accounts for 62% of total gold ETF holdings, but there are alternatives. The iShares Comex Gold Trust (IAU, news, msgs) and ETFs Physical Swiss Gold Shares (SGOL, news, msgs) also hold bullion. The PowerShares DB Gold (DGL, news, msgs) and UBS E-Tracs Gold Total Return (UBG, news, msgs) ETFs hold derivative contracts tied to gold futures. All benefit if gold moves higher.

Credit Suisse Standard Securities analyst David Davis estimates that gold ETFs ended 2009 with nearly 2,000 tons of gold in their vaults. Compared with the world's central banks, gold ETFs collectively rank as the world's sixth-largest holders of bullion. They own more than China and sit on the list just behind France. Davis dubs SPDR Gold Shares and its ilk the "People's Central Bank."

 Ways to invest in gold

ETFs

Recent share price

52-week low

52-week high

Focus

Gold Trust SPDR (GLD, news, msgs)

$107.76

$84.92

$119.54

Gold bullion

iShares Gold Trust (IAU, news, msgs)

$107.83

$85.02

$119.58

Gold bullion

ETFs Physical Swiss Gold Shares (SGOL, news, msgs)

$109.83

$98.67

$121.86

Gold bullion

PowerShares DB Gold Fund (DGL, news, msgs)

$39.31

$31.39

$43.69

Gold futures

UBS E-Tracs Gold Total Return (UBG, news, msgs)

$30.05

$20.25

$34.01

Gold futures

Market Vectors Gold Miners (GDX, news, msgs)

$45.25

$30.88

$55.40

Gold mining stocks

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