Gold bugs are getting squished. Prices for the precious metal hit a five-year low on Monday, closing at $1,107 a troy ounce on the New York Mercantile Exchange, its lowest level since March 2010. Prices fell for a number of reasons, including weaker-than-expected demand in China and expectations that the metal won't make an attractive haven for investors in a rising interest rate environment.
Analysts as such as David Song, a currency strategist at DailyFX, and Robert Haworth, senior investment strategist at U.S. Bank Wealth Management don't expect prices to rebound anytime soon. But that's fine with Keith Trauner, a co-founder of GoodHaven Capital Management, which has $500 million in assets under management. He has added to his position in Barrick Gold (ABX), a gold miner whose share price plummeted 16 percent today.
In an interview with CBS MoneyWatch, Trauner said the current negative sentiment around gold reminded him of when the yellow metal was out of favor on Wall Street during the late 1990s.
"People were giving up," he said, adding that he considers himself a value investor rather than a "gold bug," which refers to people overly enamored of gold. "Headlines were terrible. You started seeing cover stories talking about why gold will never rally again."
Figuring out when that may happen, though, is the tricky part. According to the World Gold Council, a trade group, overall demand for the precious metal fell in the first quarter compared with a year ago. Here are three factors that could keep gold prices buried for quite a while ahead.
First, gold tends to be popular during periods of high inflation, which isn't an issue these days for the world's central bankers. Song noted: "As we look across the major industrialized economies, disinflation is the bigger story."
A strong U.S. dollar and the Federal Reserve's expected liftoff for interest rate hikes underscore that point even further and "remain negatives for gold," according to Haworth. Added Song: "Demand will continue to wane this year maybe into next year."
Second, there's China, one of the metal's largest buyers of the metal, where demand appears to be soft than widely assumed. Data from the People's Bank of China cited by Reuters on Friday showed gold reserves had surged 57 percent to 1,658 tons ounces since 2009 (China rarely rarely updates information about its gold reserves), but that's a lot less than some analysts had been expecting. The decline in China's stock market hasn't helped either. Meanwhile, demand in India, another major gold buyer, has also been lackluster because of the strong U.S. dollar.
Third, although gold has been considered a safe haven for investors during turbulent economic times, experts such as Wharton professor Jeremy Siegel argue that over the long run it has underperformed other asset classes such as stocks. Nonetheless, many investors own either physical gold or shares in gold miner's stocks in their portfolio with one notable exception. Warren Buffett avoids the yellow metal because he says it "has no utility," among other reasons.
However, noted Trauner: "The metal itself has had a role for thousands of years as kind of an alternative currency or restorer of value. The idea that that role completely disappeared in the last three ... it's probably unlikely."
But when exactly gold will again be, well, as good as gold is anybody's guess.