Gold dropping like a rock with who knows where to go

By Dian Vujovich

Remember when gold nugget jewelry was all the rage? People were adorning themselves with all sorts of chunky rings, earrings and bobbles. That, however, was a number of yesteryears ago. Today chunks of gold aren’t hot –even when still in the ground—as the price of this precious metal has fallen to lows not seen in four years.

I read this comment from a reader following one of the Bloomberg.com pieces on gold written earlier this week: “Mark Twain described a mine as “a hole in the ground owned by a liar.”

The writer identified himself as a “gold and silver trader”. One, I’d say, who clearly has a sense of humor, sees some truth in Twain’s saying and understands that there’s more to investing in this precious metal than merely mining it.

Before citing comments from a few pros, here’s the scoop on gold prices: For openers, gold hit a record of $1,923.70 in 2011. It closed yesterday at $1,145.70. At around 11:30 today, (11/6/14), Bloomberg.com showed COMEX gold priced at $1,145.30. That’s down nearly 780 bucks from it’s high.

During the month of October, SPDR Gold Shares (GLD) closed down 3.05 percent, and year-to-date through October, off 2.98 percent, according to the Bespoke Investment Group.

And from a recent Motley Fools report, gold futures closing price of $1,145.70 an ounce was the lowest close of the S&P/TSX gold index since November 2001.

Finally, from a Nov. 5th Bloomberg.com piece:” Gold and silver slid to four-year lows as the Bloomberg Dollar Spot Index climbed after Republicans gained control of the Senate from the Democrats in U.S. midterm elections and Bank of Japan Governor Haruhiko Kuroda said he saw no limit to the steps the BOJ may take to defeat deflation. About $1.66 billion was erased from the value of precious metals exchange-traded product holdings today.”

So what’s that all mean for investors holding gold or those who find the low price titillating? Well, a couple of things.

First, be mindful of a coming rising interest rate environment and the current strong dollar. Neither is good for the glittery if it’s rising gold prices you’re looking for.

“People expect policies from the Republicans that lend confidence to the outlook for the economy,” Scott Gardner, who helps manage $450 million at Verdmont Capital SA in Panama City, said in a telephone interview for a Bloomberg.com piece. “Conservatives by nature are more hawkish and that is pushing the dollar higher. People do not see the need for gold.”

If it’s mining stocks that hold appeal, pros worry that gold falling to $1,100 could result in some mining companies having their lines of credit withdrawn or having to hedge output.

Now back to that “need” thing.

From Iain Butler, CFA, and Chief Investment Adviser Motley Fool Canada comes this: “In my opinion, the bigger-picture reason for the decline is that there is very little in the way of natural demand for this commodity. You and I do not need gold to get through the day. We need oil, we need natural gas, we need copper, zinc, potash, etc. We don’t need gold.”

True, except if you love gold jewelry. Or, a buying opportunity.

In the end, what seems to be true about investing in gold is the same old advice advisors have been giving for decades: A small allocation to it in one’s portfolio can make a positive difference when other asset types aren’t performing well.