10 Reasons the Gold Bugs Lost Their Shirts

It has been quite the ride for gold: from under $500 an ounce a decade ago, to above $1,900 in 2011, gold gained more than 400 percent. Since its peak of ~$1,921.15 on Sept. 6, 2011, however, the shine is off the yellow metal. Gold plummeted 38 percent, recently breaking below $1,200. Yesterday’s close is within 5 percent of the lows, at $1,241. If a 20 percent drop is described as a bear market, and a 30 percent fall is called a crash -- what do we call gold’s almost 40 percent plummet? This column is not an “I told-you-so” or an exercise in “Goldenfreude” (describing a “delight in gold bugs’ collective pain”). Rather, it is an attempt to learn some investing lessons from the epic rise and horrific fall of gold. As an investor, I am a gold agnostic: When used properly, the metal is a potentially valuable tool in an investment arsenal. There are times when it makes for a profitable part of a portfolio, as in the 2000s. There are periods when it is a speculative and dangerous trade -- such as the 2010s. There have also been decades when it does nothing, earning no return, generating no income, essentially dead weight to a portfolio, as in the 1980s and 1990s. 
In 2013, for the first time in 13 years, gold was negative on the calendar year. It began 2011 at ~$1,405 and ended at ~$1,540. In between, it peaked above ~$1,900, giving back most of the year’s gains. It closed 8.7 percent higher than where it began 2011, after rallying nearly 35 percent earlier in the year. Unless something radically changes in the near future, that may very well be the peak for this secular cycle. Source: Bloomberg Source: Bloomberg Not very long ago, metal analysts were tripping over one another to put ever-higher price targets on gold, with forecasts of $2,500, then $5,000 and even $10,000 an ounce. Individual investors, institutions and foundations were buying the metal as fast as they could, regardless of price. What a difference two years make. The mania for gold, like all manias, is ending badly. Some gold fans may argue that the cycle is not over yet, and they may be correct. However, any asset class that loses almost 40 percent of its value in two years is worthy of further study, a teachable moment of what not to do in a trade. 
Source : bloomberg.com