The stock market's dreadful January coincides with a chorus of predictions that the fall of gold has reached bottom from its lofty peak in 2011. Gold is the investment of the fearful, and there's fear of just about everything from recession to terrorism. Indeed, gold rallied 6.3 percent during the past six weeks.

On casual inspection, it's easy to conclude that the price of gold has nowhere to go but up after a four-year slide to $1,045 an ounce in December from a record $1,923 -- a 46 percent decline measured by futures contracts.

Look harder. Gold has fallen much faster and a lot further before. Between January 1980 and June 1982, for example, the precious metal lost 66 percent of its value, dropping to $298 from $873.

That made sense. The gold price had been driven up by fearsome inflation, which soared to 14.8 percent before receding to 2.5 percent by July, 1983. The yield on the 10-year Treasury note, a reflection of the Federal Reserve's determination to shore up financial assets, reached 16 percent. As these rates fell back to earth, so did gold. Inflation today is barely visible at 0.7 percent.

David Fuller's view

Do people overstate the extent to which gold’s price is driven by fear?  I have often thought so, although gold is probably driven even more by human emotions than most other investments, primarily because it is pretty, unique and all but indestructible. 

The people who say that gold’s price is primarily driven by fear generally do not like the yellow metal, in my opinion.  That is understandable because fear is a fickle friend of gold.  Our financial fears are usually unsustainable beyond the short to occasionally medium term, as we experienced during the first three weeks of this January.  Moreover, a fear-driven market needs increasing fearfulness to sustain its trend.  In other words, when fear subsides, the market reacts. 

Gold is actually a long-term store of value.  In fact, it is the oldest and most enduring store of value in human history.  Consequently, gold has been hard money since well before the days of fiat currencies.  In fact, gold is THE hard money, due to its colour, scarcity and because it cannot be reproduced.  These factors have ensured that the value of gold has outperformed all other assets over the very long term.

Can gold still do this in our modern, increasingly high-tech world?  Presumably, although important, appealing, one-off manmade assets can have phenomenal price appreciations, whether paintings, buildings, vintage cars or any other collectibles, because of their unique beauty and scarcity.  However, their prices are even more subject to fashion than gold, and they are also likely to be wasting assets over the long term.  

As for the all mighty dollar or any other fiat currencies, these are convenient units of exchange, printed sufficiently to ensure that they have diminishing value.  You can see this from the US Dollar’s declining purchasing power over the last fifty years.

Today, I think gold’s price is low enough to be worth buying lightly on setbacks, although from an investment standpoint, I would not have more than 5% of my portfolio in gold, and I do not have even that at the moment.  If gold is gradually being remonetized in the eyes of investors, it should at least provide some trading opportunities, especially as bombed out commodities gradually recover.      

(Subscribers may also be interested by Matthew A Winkler’s comments on stock markets in the middle to latter part of the article above)    

(See also Eoin’s comments on gold below)