A Warning for Gold Bugs: This Rally Won’t Last
The enthusiasm surrounding gold’s big first-quarter rally suggests its shine is set to dull sooner rather than later
Gold investors should enjoy the party while they can. The good times are probably coming to an end.
Bullish headlines following gold’s 16.5% first-quarter surge were in full force last week. CNBC claimed there was still upside ahead following the biggest quarterly rally in three decades. Bloomberg said even the bulls were stampeded by gold’s sharp move. And The Wall Street Journal touted the growing number of bullish bets on the metal.
Such enthusiasm and unanimity suggests gold’s shine is set to dull sooner rather than later.
Gold often thrives as a haven in times of turmoil, or acts as a hedge against inflation. Devotees love pointing to negative interest rates around the globe as evidence that has recently made gold glitter more than usual.
The problem is these theories don’t take into account a fundamental analysis of gold’s intrinsic value: It doesn’t really have any. Unlike many financial assets such as stocks, bonds, real estate and others, gold doesn’t generate any income. Valuing it is virtually impossible.
At least in the short run, sentiment tends to be the driver. It looks overextended. As Mike Dragosits of TD Securities puts it, bullish exchange-traded-fund inflows and sanguine net speculative positioning have reached extreme levels. Those historically have been contrarian signals. Gold is now facing “near-term correction risk,” he says.
And the turbulent times that helped push gold higher at the beginning of the year have largely dissipated. Most of gold’s first-quarter gains came during the first six weeks of the year, when fear about China and the global economy was paramount.
Financial markets have calmed, economic data have been better and overseas action has steadied, including Friday’s optimistic report on Chinese manufacturing activity. Gold already has fallen about 4% since last month’s peak, largely a result of those improving trends.
And even amid a strong first quarter, gold is still off about 35% from its peak of 2011 just shy of $1,900 an ounce.
A return of market panic can never be ruled out, of course. Barring that, it is last call for gold bulls. As much of the past five years have shown, the hangover isn’t pleasant.