A safe haven loses its luster

As gold’s value continues to plummet, many investors banking on it wonder: How low will it go?

New York TimesApril 13, 2013 


In the vault of the Federal Reserve Bank of New York, the largest trove of gold – half a million bars – has lost about $75 billion of its value.


Below the streets of Lower Manhattan, in the vault of the Federal Reserve Bank of New York, the world’s largest trove of gold – half a million bars – has lost about $75 billion of its value. In Fort Knox, Ky., at the United States Bullion Depository, the damage totals $50 billion.

And in Pocatello, Idaho, the tiny golden treasure of Jon Norstog has dwindled, too. A $29,000 investment that Norstog made in 2011 is now worth about $17,000, a loss of 42 percent.

“I thought if worst came to worst and the government brought down the world economy, I would still have something that was worth something,” Norstog, 67, says of his foray into gold.

Gold, pride of Croesus and store of wealth since time immemorial, has turned out to be a very bad investment of late. A mere two years after its price raced to a nominal high, gold is sinking – fast. Its price has fallen 20 percent from an August 2011 record and closed Friday at $1,501 an ounce.

It is a remarkable turnabout for an investment that many have long regarded as one of the safest of all. The decline has been so swift that some Wall Street analysts are declaring the end of a golden age of gold.

The stakes are high: The last time the metal went through a patch like this, in the 1980s, its price took 30 years to recover.

What went wrong? The answer, in part, lies in what went right.

Analysts say gold is losing its allure after an astonishing 650 percent rally from August 1999 to August 2011. Fast-money hedge fund managers and ordinary savers alike flocked to gold, that haven of havens, when the world economy teetered on the brink in 2009.

Now, the worst of the Great Recession has passed. Things are looking up for the economy and, as a result, down for gold. On top of that, concern that the loose monetary policy at Federal Reserve might spark inflation – a prospect that drove investors to gold – have so far proved to be unfounded.

And so Wall Street is growing increasingly bearish on gold, an investment banks and others deftly marketed to the masses only a few years ago.

‘A psychological market’

On Wednesday, Goldman Sachs became the latest big bank to predict further declines, forecasting that the price of gold would sink to $1,390 within a year, down 7 percent from where it traded Friday.

Societe Generale of France last week issued a report titled “The End of the Gold Era,” which said the price should fall to $1,375 by the end of the year and could keep falling for years.

It is hard to know just how much money ordinary Americans plowed into gold, given the array of investment vehicles, including government-minted coins, publicly traded commodity funds, mining company stocks and physical bullion. But $5 billion that flowed into gold-focused mutual funds in 2009 and 2010, according to Morningstar, helped the funds reach a peak value of $26.3 billion. Since hitting a peak in April 2011, those funds have lost half of their value.

“Gold is very much a psychological market,” said William O’Neill, a co-founder of the research firm Logic Advisors, which told its investors to get out of all gold positions in December after recommending the investment for years. “Unless there is some unforeseen development I think the market is going lower.”

Gold’s abrupt reversal has also been painful for companies that were cashing in on the gold craze. In the last year, two gold-focused mutual funds were liquidated after years that saw only the opening of new funds, Morningstar data shows.

Some holding out hope

Gold’s most vocal bulls say gold doubters are losing faith too easily. Peter Schiff, the chief executive of the investment firm Euro Pacific Capital, said that he still expected gold to hit $5,000 an ounce within a few years because, he said, the world is headed for a period of dangerous hyperinflation.

“People believe the U.S. economy is recovering. It’s not,” Schiff said.

The most famous investor who is standing by gold is John Paulson, the hedge fund manager who made a fortune betting against the U.S. housing market. His $900 million gold fund reportedly dropped 26 percent in the first two months of this year.

Paulson’s losses were particularly severe because he bet heavily on gold mining companies, which have fallen more sharply than gold itself.

Norstog, in Pocatello, made a similar mistake. He put his money in a gold fund that was focused on mining company stocks.

“If I had to do it all over again, I would have just bought the gold,” Norstog said. “At least that way I could have run my fingers through the glittering coins.”

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