Over the past few years, I've been asked on several occasions about my opinion on gold. I responded that my problem with gold is that I only know how to value assets with coupons, dividends or earnings. I also observed that the price of gold had already increased sevenfold since Jan. 20, 2001. That was when George W. Bush gave his first inaugural address. It was $265 per ounce back then and soared to a record high of $1,895 on Sept. 5, 2011. It was even a better buy in 1964, when "Goldfinger" was released and gold's price was pegged at $35 an ounce, as it had been since 1934 and remained until Nixon took the U.S. off the gold standard in 1971. Wednesday, the price tumbled $41 to $1,563, down $229 from last year's high and $332 from the record high.
The recent plunge in the price of gold happened despite a bullish Feb. 14 news release from the World Gold Council, the London-based industry group. It reported that central banks boosted gold purchases by 29% to 145 metric tons in Q4 2012, the eighth successive quarter of net buying. In the full year, the central banks bought 534.6 tons of the precious metal - the most since 1964, when Goldfinger plotted to nuke Fort Knox! On the other hand, demand for gold in India was down 12% last year and flat in China. ETF demand rose 51% last year, but was down 16% quarter-over-quarter during Q4 2012, as many hedge funds bailed out.
Other than profit-taking, what might be the fundamental reasons behind gold's weakness? Perhaps the most important reason for the weakness in gold is that after three years of “living dangerously” - with lots of panics about apocalyptic endgame scenarios - the global economic and financial outlook is improving. That means that central banks might start to ease off on easing.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.