“We believe that precious metals remain a relevant asset class in modern portfolios, despite their lack of yield,” said Goldman Sachs in a recent report on the dilemma of what investors should do about falling gold price . “They are neither a historic accident or a relic,” the report, titled “Fear And Wealth” continued.

Following the financial crisis, demand for gold skyrocketed as investors looked to protect themselves from the much-feared rampant inflation following QE that was about the grip the world. This inflation never materialized, and now that the Federal Reserve is beginning to wind down its asset buying, demand for gold is evaporating.

However, according to Goldman, investors shouldn’t give up on the asset completely. Sentiment towards gold tends to move quickly, as uncertainty grows/falls. That’s why the asset should continue to hold a place in investors’ portfolios:

“Stated more simply, we are talking about the drivers of ‘risk-on, risk-off’ behavior in markets…This factor matters so much to gold precisely because it is a safe-haven asset. Accordingly, as uncertainty increases, preferences shift towards having more gold in the portfolio, driving prices higher. Fear can spike or fall quickly, and since DM economies tend to have more wealth to reallocate as the world gets riskier, this is both a medium- to short-run driver and more one exposed to the DM growth outlook.”

There’s also the long-run demand picture to consider:

“As more EM economies — including China — are set to grow to these income levels over the next few decades, the underlying long-term demand picture remains supportive of gold prices…While fear can spike or fall relatively quickly, wealth tends to accumulate slowly. This makes wealth an important, but easy to overlook in short-term forecasting, driver of gold.”

Falling Gold Price  Reversal

Gold prices have been on the backfoot since reaching records in 2012. For 2012 the price of gold averaged $1,669 an ounce, compared to $1,249/oz year to date.

Analysts at Incrementum AG note blame the recent price weakness on rising global equity markets. In the firm’s 11th annual “In Gold we Trust” report, the analysts point out that today, with the falling gold price and rising equity markets, relative valuation of commodities to equities seems extremely low compared to history. Specifically, in relation to the S&P500, the GSCI commodity index is currently trading at the lowest level in 50 years. Also, the ratio sits significantly below the long-term median of 4.1.

Falling Gold PriceWith gold looking cheap on a technical basis, the analysts at Incrementum also like the look of gold from a fundamental perspective. As mentioned above, the post-crisis thesis for gold was that central bank money printing would lead to rampant inflation. For the past decade, inflation has remained subdued, but now it looks as if it is picking up again — a positive sign for gold and other commodities investors.

Falling Gold Price

Falling Gold Price

Finally, the case for 5,000 gold below, caveat emptor.

Full PDF can be found here Chartbook-In-Gold-we-Trust-2017