After a spectacular run for several years, gold’s value is down almost one-third over the past year. Many gold investors are stunned, but should they be? N.C. State University economist Mike Walden responds.
“Well … gold is a very, very unusual investment. If you look at a stock, now certainly people’s attitudes about a stock can help determine what its value is. But at least there’s something behind that, that stock. There’s a company and their performance.
“(We) really don’t have that with gold. Really what drives gold is totally sentiment, and it’s a sentiment really about what is going to be the future value of the U.S. dollar. That’s really the key. When people feel as if the U.S. dollar’s purchasing power is going to go down substantially in the future, they rush to gold and buy gold. And that’s really been driving up the price of gold. But then when their attitude changes, when they say, hey, the dollar is not going down, that may cause them to sell gold. And I think a lot of experts think that that’s been happening over the last year.
“Perhaps surprising to many, the U.S. dollar has actually been strengthening. And I think that’s due to a couple of reasons: One, weakening of other currencies, particularly the euro and the yen; and secondly, the realization that the U.S. economy is not going down; it’s actually going up. It’s actually strengthening, and it’s actually strengthening again against many of the economies of our trading partners.
“Now I should, I should clearly say, that this since gold is driven by a sentiment, sentiments can change on a dime. But right now, the sentiment seems to be working against gold.”