The rollercoaster ride in the price of gold has spooked many investors. Early last week, it suffered a two-day rout of more than US$200, the steepest plunge since 1983, when the last bull market in gold was ending and the two-decade bear market began. So much for its reputation as a safe haven! It has since staged a recovery but is still down more than 10 per cent from the start of this month.
The violent volatility in the price of gold last week proved that, far from being a safe store of value as many believed, it has become as much an object of speculation as any risky asset class. It used to be where investors ran when they smelled a whiff of danger or crisis. Now they run in the opposite direction.
For sure, gold investors have been amply rewarded in the past decade, with prices having risen more than 600 per cent to a peak of US$1,920 in September 2011. Comparatively, the S&P 500 was flat.
But this only proves the truth of what George Soros said about gold being "the ultimate asset bubble". However, this billionaire speculator was clever enough to buy into the bubble and started offloading his massive positions from the peak until he almost sold all his holdings last year.
What does all this mean for investors with far less acumen?
First, if gold prices could suffer such violent swings, it means other risky assets are not safe from extreme volatility either. But investors should have learned this from experience during the global financial crisis of the last few years.
Second, the gold plunge coincides with the fall in the prices of base metals and agricultural commodities. Falling commodity prices may mean lower demand as global growth continues to disappoint. They may also mean inflation is less likely, so gold as an inflation hedge is no longer attractive. Warnings of hyper-inflation caused by monetary easing in the US have proved to be wrong or premature. Gold bugs may still be convinced that inflation looms, but many other investors are running to exit gold.
It's the emerging economies that are experiencing higher inflation figures. Interestingly enough, the fall in gold prices has led people in emerging markets to buy physical gold on a massive scale, leading to reports of stocks running low or simply running out. But if gold is not a safe haven, then nothing really is. The age-old adage is never more appropriate than now: Investors, beware.