Lessons Learned From Gold in 2011

Commodities made headlines throughout most of last year, but for all of the wrong reasons. 2011 saw a number of commodity investments turn sour with just six of the 22 major commodities posting annual gains. No commodity was more talked about than gold, however, as the precious metal took investors on a wild ride. After finishing 2010 with gains of approximately 29.5%, investors had caught gold fever and piled into the safe haven commodity. But the following year would be filled with both joy and frustration as gold was all over the board in 2011 [see also Three Reasons Why Gold Is Overvalued].

2011 At a Glance

Gold started it’s year off just below $1,400/oz., a level that already was making headlines around the world. After a brief dip in the month of January, gold hit its stride for the next several months, appreciating from $1,348 to as high as $1,893, an increase of 40.4%. It is important to note that the majority of these gains came during July and August; the first half of the year was relatively tame. Gold’s story for the first half of the year is relatively simple; investors were excited to buy in on the trend and the precious metal was able to benefit from this behavior. With stocks performing relatively well it seemed that we may have finally been on our way to recovery, allowing gold to make steady but impressive gains. But that all changed in the third quarter, when a number of factors combined to put a hit on stocks and send gold through the roof [see also The Ultimate Guide To Gold Investing].

The first month of Q3, July, saw gold post returns of roughly 8.4%, already dwarfing its performance from the first six months of the year and creating reason for a number of investors to hop on board. But gold’s real luster came in August, when a slew of data combined to push the metal to its historic highs. The month started off with a deadlocked congress that nearly failed to agree on a budget bill; the legislation was passed with just hours to spare, narrowly avoiding a federal shutdown. Investors reacted poorly to the seemingly disorganized Washington, leading to a massive outflow from equities and into gold. Next came the first-ever downgrade of U.S. credit quality by Standard & Poor’s, effectively booting us from the AAA club, and sending gold to its highest prices of all time. In fact, GLD briefly surpassed SPY to become the world’s largest ETF [see also 12 High-Yielding Commodities For 2012].

By this time, volatility was surging on a daily basis, and most investors felt safe in their gold holdings, causing GLD to post gains of about 12.3% for the month alone. Through the first two months of Q3, GLD was up nearly 20%, but September had other plans in mind. The month started off with a great gold outlook; the Swiss franc (what many considered to be the last remaining safe haven currency) was pegged to the flailing euro, leaving gold as the stand-alone safe investment. This led to a rapid appreciation in GLD as well as massive inflows. However, once the euro began to experience significant failure, investors worried that there were simply no safe havens left in the market, and with gold seemingly overbought, traders were quick to take profits and sell out [see also Top 5 Commodity ETFs Of 2011].

September watched gold plummet by nearly 9% and spooked investors from the once popular safe haven. Though the metal was able to slightly recover in October and November, the final month of 2011 watched prices fall as low as $1,530/oz. creating an interesting opportunity to buy in to the metal [see also Gold And Silver In A Correlation Bubble?].

Time To Buy?

Gold is still sitting well below its highs of last year, leading many to believe that it is only a matter of time before we see the metal shoot back up in price. With the commodity appearing to be relatively cheap, many have argued that now is a great time to buy in while others urge that gold has yet to hit its bottom. Though 2012 has been short thus far, gold has been making significant strides and is already flashing signs of a similar performance to the first half of last year. For those looking to make a play on the elusive commodity, the iShares Gold Trust (IAU) is one of the the best options. This physically-backed ETF offers fees of just 25 basis points and is one of the most popular funds on the market. For those a bit more savy to commodity investing, buying a longer-term GC Gold futures contract on the COMEX may be your best bet [see also Seven Reasons To Hate Gold As An Investment].

Disclosure: No positions at time of writing.