Not since California's fabled forty-niners raided the Sierra Nevada has gold inspired such a passion in the masses. But unlike the miners of yore, the 21st-century rush for the precious yellow metal is being fueled by a wildly divergent army of gold bugs ranging from devotees of Ron Paul who want the United States to return to the gold standard to Middle Eastern sheiks, Asian central banks and the rising members of the professional class in India.
Feeding the global hysteria has been gold's spectacular rise by nearly 1,000 percent from $255 an ounce in 2001 to $1,922 at the peak in September 2011.
Gold's rise seemed unstoppable at one point, but millions of fanatics got a jolt last month when the market posted its biggest collapse in 30 years, including a 9 percent one-day drop to less than $1,400 on April 15.
After the precious commodity dropped 30 percent from its high, it rebounded to $1,469 in New York trading Thursday afternoon. Yet gold's detractors see the April crash as the beginning of the inevitable reckoning after a decadelong, unsustainable surge in prices. For aficionados, on the other hand, the jolt represented only a temporary setback and a "buying opportunity" to acquire gold at lower prices.
"Whoever started swatting at the gold bugs proliferating worldwide may find the infestation none too easy to control," said Eric Schaefer, an analyst at American Independence Financial Services. Like many other gold bulls, he casts blame on the biggest players in the market for causing the crash.
Some have fingered big investment banks such as Goldman Sachs Group Inc., which in April forecast a fall in gold prices and then helped bring that about by selling off large holdings. But Mr. Schaefer accused the "world's central banks" of orchestrating the drop in prices with the goal of deflating the gold bubble and chasing investors into more economically productive investments. Although the central banks of China, Russia and other major emerging countries have been helping lift the price of gold with hefty purchases in recent years, rumors abounded during the crash that the central banks of Cyprus and other European nations were preparing to sell some of their gold reserves to stave off national insolvency.
"The spot price of gold is a barometer of financial pessimism," Mr. Schaefer said, with high gold prices signaling that investors and consumers have little confidence that central banks will prevent inflation and otherwise manage the economy wisely. The authorities, fed up with this vote of "no confidence" from investors, may have hoped to instill confidence by pushing down the price, he said, but they were thwarted.
Mr. Schaefer, voicing a common theme among gold investors, said central banks such as the U.S. Federal Reserve and the Bank of Japan are at the root of the problem because they have been printing prodigious amounts of money to spur their sluggish economies. That eventually will cause a spiral of inflation, he predicted, though he acknowledged that inflation so far has been "the dog that has not barked."
Asia drives gold demand
Demand for gold should remain robust, he said, noting that gold purchases in India and China — which together generate more than 50 percent of world demand — picked up when the price fell last month. That shows the insatiable demand for the precious metal in emerging countries, where citizens have little faith in the government or the stock and real estate markets and view gold as the most trustworthy investment, he said. Purchases of gold also picked up in Middle Eastern capitals such as Dubai, where gold is considered a measure of wealth and status.
John Browne, an economist with Euro Pacific Capital, agreed that a loss of confidence in major central banks is what is driving gold's rise among investors. Though gold prices may be down for now, it will emerge victorious once the Fed's inflationary policies come home to roost, he said.
"The tug of war between inflation and confidence in fiat money may persist for some time," he said, but "the weight of history will eventually come down against paper. It always has, and it always will."
Not so fast, said Michael Weithman, an investment writer at Seeking Alpha who believes the gold bubble has burst. While citizens and central banks in India and China may continue to buy gold, bolstered by quickly rising incomes and growth, the rest of the world has been turned off by the hyperbolic surge in prices and has cooled its enthusiasm for the metal, he said.
As measured in U.S. dollars, total world purchases of gold barely paused during the 2007-09 recession, he said. But measured in tons, demand for gold has declined everywhere in the world except India and China since 2007, according to World Gold Council figures. That means the rush for gold is mostly an illusion that has become increasingly apparent with the retreat in price, Mr. Weithman said.
"India and China cannot be overlooked," he said. "The strong demand in Asia should continue," but "the price has risen too quickly for rational consumers" everywhere else.
Investors, now stung by sudden losses, are starting to follow suit and abandon their quest for gold, he said.
"My prediction is that gold will go out in a whimper; it will not crash like the equity or real estate bubbles that preceded it," he said.
Investors fuel bubble
The ancient practices of purchasing gold for adornment and wealth still thrive in Asia and the Middle East, but the surge in prices in the past decade has been fueled mostly by investors and central banks in emerging economies, analysts say.
Hedge funds, pensions and other major investors often diversify by putting small shares of their pooled funds into gold and other commodities, but the investment craze heated up nearly a decade ago when gold became widely available to small investors through exchange-traded funds and gold stocks, which are instruments backed by gold that investors can use to cash in on rising prices without taking physical possession of the metal.
Investment in gold funds soared from close to zero in 2003 to $140 billion last year. But the market for gold funds is shrinking fast this year, to more than $100 billion as of April 13, according to calculations by Bloomberg News.
Now that price charts no longer show a steep incline, gold is losing value to investors, who look to resell the commodity rather than hoard or wear the metal, said Mike Williams, a small investor and blogger.
"The tide for gold has changed," he said. "Investors are now in the 'return-to-normal' phase of bubble psychology."
The biggest problem is that gold doesn't pay interest or dividends, so the only upside for the investor is the rise in price, he said. "The pressure for [yield] is simply too great to be holding significant amounts of gold."
Avi Gilburt, manager at Gilburt Financial Services LLC, said investors have been exiting the market en masse since last month but that gold remains a favorite topic in investment circles. In particular, "the few bulls left in the market" continue to push reasons — such as the advent of the "Indian wedding season" — for maintaining their gold-buying habits.
"What we are seeing is that everyone and their mother is now providing 'analysis' as to what is happening in the metals markets. I have never seen so many articles coming out," he said, leaving readers with "their heads spinning with so much information."
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