Gold has been the most talked-about investment and was the place to be for nearly 12 years. It moved from $250 per ounce to more than $1,900 per ounce while the stock market gyrated on its roller coaster ride. When investing in gold you could not go wrong. Then something happened.
No sooner did gold break $1,900 an ounce, with calls for much higher prices, then it went flat line. Gold has now been declining since August 2011. That begs the question: “How did we get here and what do we do?”
A key driver of the significant rise in gold prices since 2000 has been the emerging-markets consumer. Between 2000 and 2010, consumers in emerging markets accounted for 79 percent of total demand. This expanded framework demonstrates that gold is also positively exposed to pro-cyclical factors in the emerging markets.
Over the past 13 years, the impact of emerging markets on gold prices was unequivocally positive: emerging markets drove gold prices higher. However, this has not always been the case through history and, we believe, will not always be the case going forward. Emerging markets can be both a positive and a negative driver.
The impact of the Asian financial crisis is instructive. As the economies in the region fell into recession, the purchasing power of consumers in Southeast Asia declined commensurately. Thailand, Indonesia and Korea all became net sellers of gold, albeit briefly. In line with the drop in demand and the drop in the regional stock markets, gold prices fell 25 percent.
Another big reason for such a sharp and drastic increase in gold’s price is the creation of ETFs. Roughly $150 billion flowed into the gold market via Gold ETFs. SPDR Gold Shares (ticker: GLD) allowed investors to own gold in their investment accounts as easy as buying stock. GLD went from a fledging new idea in 2004 to holding more than 1,000 tons of gold today. That’s more gold than the reserves of a large government, including Japan, Russia, China and Switzerland.