In the commodities market, something that is considered incredibly precious in normal life may have lost some its luster for investors. The price of gold, which has seen its value surge in the past few years, saw its biggest price drop in over 30 years.
The drop in the precious metals price was part of a general sell off in commodities, which saw oil and other precious metals such as copper and silver fall as well. But gold has acquired this sort of mythological status among its defenders as the perfect investment in recent times, as though recent economic policy, events, and future events have rendered completely immune to the tendencies of markets to correct overpriced markets. This week’s drop provides a powerful shock to that narrative.
Gold dropped to a two year low over the past week, although it managed to pull itself back from the brink a tiny bit at the end of the week. Still the drop was considerable, as the graph of historical gold prices below shows:
The drop in gold was seen by many as a necessary correction of an asset that had been riding strong for several years. Michael Strauss, chief investment strategist of the Commonfund Group, told Bloomberg, “Excess supply is the biggest issue so this was a necessary correction like we saw in gold. It will take a strong economic cycle to push prices higher.” Goldman Sachs slashed its forecasts of gold prices and put out a recommendation earlier in April that clients should go short on gold. The investment bank said that gold would hit a price of $1,270 by the end of 2014, something it nearly did in the past week before slightly rebounding.
The last time gold dropped this rapidly was in 1980, after reaching a high of $850. After the 1980 price crash gold prices continued to crater, reaching a low of $251.95 in August of 1999. Gold has shaved off 26% of its value from a high of $1.900.23 in September of 2011. A drop of more then 20% is traditionally considered a signal of a bear market for an asset in investment.
The public perception of gold has also taken a hit. In 2011, Gallup recorded gold as being the one investment that Americans considered best for the long-term, with 34% of Americans expressing this opinion. This was more than one and half times greater then the second place, real estate at 19%.
Public opinion on gold has soured, with it falling 10 percentage points to 24% of Americans thinking it is the best long-term investment in April of 2013. Real estate climbed from second place to first, 25% of Americans ranking it as the best long-term investment.
Gold may rebound again, although the drop leaves the price with quite a bit of ground to makeup to reach the previous high. But this whole episode proves that no commodity or even asset is immune to the chutes and ladders of the financial markets.