…One metals analyst at a bank captured the muddiness of the gold case perfectly. “Gold,” the analyst wrote this week, “appears in the process of convincing investors that its stint as a hybrid between a safe haven and a risk asset is coming to an end.” When the very identity of an investment is in flux, it may be time to step back and ask what it’s really worth.
This uncertainty is reflected in gold’s volatility. While gold gained in each of the past 10 years, the metal tumbled almost $400 late last year, unnerving anyone who sought it out as a bulwark against more risky corners of a portfolio.
Gold has always been difficult to value because it has no yield and little utility other than rings, bracelets and necklaces.
However, with real returns on Treasury bonds negative, the same quandary applies to other traditionally safe investments, or even what goldbugs like to call “fiat money”. These assets become as much a reflection of investor fears and hopes as any rigorous valuation.
Gold’s future direction may well hinge on whether central bankers are able to stoke the economy without touching off an inflation brush fire along the way. Interest rates could rise quickly after 2014, creating opportunity costs for holding gold. Gold crumbled from inflation-adjusted records in 1980 after the Federal Reserve jacked up rates to fight inflation. Meanwhile, investors have a lot of gold to unleash if they want to. Holdings in the largest gold exchange-traded fund stand at nearly 1,300 tonnes, close to an all-time high. The nugget thieves of California may have picked a top.