Since the 2008 economic meltdown many investors have been flocking to gold as a hedge against currency inflation, and a safe store of value in a volatile trading world. It’s worked so far, but the price of gold fell below $1600 today for the first time since August.
Some are now questioning if the metal’s price is finally ready for a correction?
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The fall in the price of gold came after Ben Bernanke, chairman of the Federal Reserve, said that the U.S. economy was recovering. Economic recovery means that gold is no longer needed as a safe store of value.
With the impressive gains in stocks so far in 2013, the S&P 500 (INDEXSP:.INX) is up almost 7 percent since the beginning of the year, money is no longer flowing into gold.
Many have said that gold is a bubble because the arguments for its inherent value don’t make any economic sense. It is true, of course, that just because something isn’t logical doesn’t mean that it’s not happening. Gold, despite evidence to the contrary, has been held in high esteem during the financial crisis. However, it may no longer be useful to investors, and that means it may be in for a price readjustment.
Some big hedge funds have gotten in on the gold market in the last year or two. One of the most famous examples is John Paulson‘s investments in Gold, but George Soros and many many others have also reaffirmed their belief in gold by purchasing gold stocks, and the precious metal itself.
Gold’s time to shine may be over, but the metal is certainly not going away. Very few investors are going to take a few weeks of growth in the equity markets and some positive comments from the Chairman of the Fed as proof that the economy is now on the the path to recovery. There are still massive problems to be dealt with in the United States.
Unemployment is the most often highlighted problem with the economy. Current levels of unemployment, and work force depletion, are not sustainable and they’re a massive drain on the country’s resources. If the country continues to have a “jobless recovery” investors will not be convinced that there has been any recovery at all.
It’s definitely too early to tell whether or not gold has had its day, or whether the market was a bubble in the first place. The lesson to take is that Gold is negatively correlated with increased outlook for the economy.