Should You Bail On Gold?

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For a long time, gold bullion has been viewed as an investment worth considering for an appropriately diversified portfolio. If you have gold holdings or you’re up-to-date on alternative investment strategies, you’ll likely be familiar with all the arguments that have favored gold over the years: its price tends to be fairly stable (and rose for a solid decade without interruption), it’s relatively low-risk, and it’s a nice alternative to currency or stocks in times of economic hardship.

But in the past two years, all of these common arguments have been thrown into question as gold prices have experienced an unprecedented drop-off. A combination of factors perhaps headlined by the steadily improving U.S. economy and strengthening U.S. dollar have led to a far less stable outlook for gold, which in turn has put those managing long-term gold holdings in a tricky position. So, is it time to abandon gold and cut your losses?

I’d always argue that that’s a question for each investor to answer individually based on his or her situation. However, some are beginning to say that yes, the time might be ripe to give up on gold for the time being. Just this week, The Wall Street Journal’s commodities section took on the topic of investors abandoning “havens” (such as gold and other precious metals) given increasing hope of a deal between Greece and its European creditors. As the article puts it, “some investors buy gold in times of economic or political uncertainty, convinced it will hold its value better than other assets in turbulent periods.” This is the long-standing philosophy. And yet, as hopes linger over Greece avoiding a disastrous default and potential exit from the Euro zone, investors are showing less inclination to flee ordinary financial assets in favor of gold. In short, where there’s no crisis, there’s no appeal.

And unfortunately for those holding gold, the talk of investors abandoning the metal in light of recent news in Europe doesn’t seem to be a purely theoretical one. The price of gold fell somewhat dramatically over the course of the day on Monday (the same day of The Wall Street Journal’s account). FXCM’s gold charts show that while the metal opened at close to $1,200/ounce on Monday morning, it was down around $1,185/ounce by the end of the work day. That’s a roughly 1.25 percent drop in a single day, taking gold dangerously close to its dramatic lows from last November. And really, Monday’s news and price reaction was just the latest in a series of disappointments in gold that have made long-term investors uneasy.
On the other hand, there are also financial experts who view the current situation—primarily as it concerns the strong U.S. economy and improving dollar—as one that’s unsustainable, meaning gold could still be a worthwhile long-term play. Seeking Alpha had an interesting article that fell within this mindset. The argument was made that recent action (or inaction, rather) by the Federal Reserve was a bad sign for gold investors. The basic idea is that the Fed has essentially allowed for the dollar to coast and continue strengthening throughout what looks to be the remainder of 2015, meaning gold could continue to fall if it follows its common trend of moving inversely to the dollar. However, the same article also states that “the dollar is extended, and its unwinding will eventually serve gold, but not quite yet.”

So again, whether or not you decide to cut your losses and abandon gold investments is up to you and you alone. Some expect that as various international issues continue to hold gold prices down, we might just be living in a new economic climate in which the precious metal just won’t be as valuable as it once was. Others believe that an eventual stalling of the dollar’s growth, and inevitable political and economic turmoil abroad, will see the gold prices rebound, eventually.

The only certainty is that managing gold investments in 2015 is very different, and arguably more complex, than ever before.

Jenna Batten is a freelance writer and entrepreneur. She enjoys covering a variety of topics including finance, technology, lifestyle, and travel.