Gold has been one of the most polarizing assets of the past decade as it enjoyed a rare 12-year bull run. Barring a borderline miracle, it looks like gold will snap its winning streak in 2013 as the precious metal has hit a wall and has failed to find any kind of positive momentum. While the yellow commodity has been sputtering for months, a number of investors have been holding onto their positions, growing more frustrated by the day as the metal has shown little signs of turning around [for more gold news and analysis subscribe to our free newsletter].
How Gold Got Here
At first, the run-up in gold prices was a quiet movement, but as the consistency held, the buzz around the metal began to build. From 2005 to 2010, gold gained an average of 21% each year, hitting an all-time high of $1,923.7 per ounce in September of 2011. At that time, the bullish sentiment for the commodity was unmatched in the investing world, it seemed like cracking the $2,000 barrier was simply a matter of when, not if.
As the Fed and Bernanke continued to toy with quantitative easing programs and print more money, the general consensus was that gold would continue to soar, but that did not happen. The asset pulled back from its 2011 highs to close out that year, and was able to post moderate gains for 2012. But 2013 has been nothing but a disappointment for the asset, as it is down nearly 24%.
As a result, many investors have started to question their positions and whether or not it is worth hanging on. Many watched famed gold bug John Paulson lose hundreds of millions on his gold positions that he eventually exited to save face. The question becomes, what should you do with your gold positions now?
All Eyes on the Fed
As we have noted in the past, today’s investing world is unlike that of anything we have seen before; investors and traders are more focused on the Fed and its easing programs than they are on actual economic data. In some cases (like the recent U.S. GDP report), positive economic numbers have spurred sell-offs because many fear that a taper will kill markets. All the while, equities continue to charge forward, putting more pressure on gold.
Your gold positions are floundering with little upside potential in the short term (though the long term still holds a favorable outlook). You need not completely exit your gold position, but it is clear for the time being that you are missing out on gains and subjecting your portfolio to frustrating losses. The S&P 500 is up approximately 25% this year while gold is down nearly 24%; a near -50% swing that many have missed out on.
As long as the Fed continues its QE program, equities are the place to be. Not only have prices been jumping, but finding a dividend-payer will add an extra income stream that gold simply cannot match. It seems highly unlikely that Ben Bernanke will touch the current policy as he will exit office early next year and pass the problem on to someone else. That someone is largely expected to be Janet Yellen, someone who has been vocal about QE programs and also seems unlikely to taper in the near future.
Once the taper does hit, gold will likely see nice jump with heavy volumes moving back into the asset, but until then equities will remain king. Timing the move will be difficult, but if you keep your ear to the ground you can enjoy the returns and income equities currently offer and re-allocate to gold once the environment and outlook improves for the commodity.
Disclosure: No positions at time of writing.