Gold prices are on the rise, and gold stocks have followed. The yellow metal has taken its lumps the last few years after falling from as high as $1,900 an ounce to as low as $1,050 an ounce. Now that gold prices are up more than 11% year to date and gold stocks are up more than 13%, is gold a good investment suddenly?
Not really—at least not as a long-term investment.
Bear Market in Gold Remains
Gold stocks have lost roughly half their value in the last five years (chart below) as gold prices have tumbled. The VanEck Vectors Gold Miners ETF (GDX) had a nice spike from 13 to 31 the first half of 2016, but by year’s end was back down to 19. It’s now back up to 23, but that still means the gold ETF has lost a quarter of its value since its August peak.
Meanwhile, gold prices have not been as high as $1,400 an ounce since 2013, never fully recovering from their late-2012 and early-2013 nosedive. Of course, for the first decade of the 21st century, gold was a good investment. It lived up to its reputation as a safe haven, as investors flocked to it after the dot-com bubble burst in 2000 and after the Great Recession of 2008-09. Gold is a nice hedge when stocks are plummeting and the dollar is losing value.
Since 2011, however, both stocks and the dollar have been on the rise; in January the dollar achieved its highest value in 14 years, and stocks hit new all-time highs just last month. So gold no longer has much value. And it’s not likely to have much value for the foreseeable future.
Just look at this 100-year chart of gold, courtesy of Macrotrends:
This chart is adjusted for inflation, which is why gold prices technically topped around 1980. But you can see the trend: when gold prices go in one direction, they tend to stay in that direction for a looong time—at least a decade or two. From their 1980 peak until their 2001 turnaround, gold prices were on a downward slog. Then they spent a whole decade on the uptick. Now we’re roughly five years into another bear market for gold. If history is any guide, a true turnaround in gold is likely years away.
Is Gold a Good Investment … Ever?
What’s worse is when gold prices fall, gold stocks tend to fall even further. The reverse of that is true too, and value investors who made the savvy decision to invest in gold miners at their late-2015 bottom and sold sometime over the summer made quite a profit. (Just ask any subscriber to our Cabot Top Ten Trader advisory, where gold stocks were a frequent momentum-based recommendation of analyst Mike Cintolo in the first half of last year.)
But gold is a fickle commodity, and any run-up is short-lived. So is gold a good investment? Only if you’re looking for a quick return on the coattails of another mini-rally in gold prices. If you’re investing for the long haul, however, it’s best to steer clear—at least until the next stock market crash.
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!