5 Signs Gold Has Peaked

By Tim Begany | May 26, 2011 AAA

If you're a long-time gold investor, you've probably made some pretty good money. The price of gold has risen every year for the past decade, returning an average of about 17% annually during that time. If the Dow Jones Industrial Average had grown as fast, it would be over 50,000 by now. The big question today is whether or not gold has peaked. Many leaders in the financial community think so, including the hedge fund investor and philanthropist, George Soros. Soros, who referred to gold as the "ultimate bubble" last January, sold the vast majority of his gold-related holdings by the end of March. (For more on gold check out Does It Still Pay To Invest In Gold?)

TUTORIAL: Commodities

Soros isn't the only one who has lost confidence in gold. In the first two months of 2011, investors in general sold 2.5 million ounces worth roughly $3.8 billion, sending the price down about 8%. Several hedge funds have also been trimming back on gold, bankers report. Here are five more signs the yellow metal has peaked.

1. No More QE2
Quantitative easing, part 2 (QE2) is just a fancy name for the second round of the Federal Reserve's efforts to support the U.S. economy with massive injections of cash. The program is scheduled to end next month because the Fed no longer thinks it's necessary, suggesting increased confidence in the economy. That's a bad omen for gold because gold prices tend to rise most when the economy is bad and fall most when things are good.

2. The World Gold Council (WGC) Opinion
If an organization backed by the mining industry admits that there could potentially be a "challenging environment," that says something. Specifically, the managing director for investment at the WGC, Marcus Grubb, was quoted in the Financial Times as saying "if and when central banks stop QE and then start raising interest rates, that is obviously a challenging environment for all asset classes - including gold." A high-interest-rate environment is tougher for all types of investments.

3. Inflation is Staying Low
Many investors are hoarding gold because they anticipate rampant inflation, which usually sends the price of gold skyrocketing. Although inflation has risen some in 2011, it's still very low - around 3%. Fed Chairman Ben Bernanke expects it to stay that way for a couple more years, at least.(For more on the relation between gold and inflations, read 8 Reasons To Own Gold.)

4. The Dollar has Strengthened
One reason gold is so popular right now is many investors see it as a hedge against a falling dollar or even as a substitute currency in the event the dollar becomes worthless. Yes, the financial crisis and recession punished the dollar severely, but certainly not to the extent many gold investors feared. In fact, it has gained strength recently, rising against currencies that have suffered because of the severe debt crisis in Europe. A rising dollar usually results in decreased demand for gold.

5. Everybody's Doing it
With just about any investment, widespread interest is a big sign that the price has peaked and may be set for a major slide. It's that way now with gold. You hear about it on TV, people are talking about it at parties and even those who generally have no interest in investments are buying it. Look at it this way: In 2005, only 16% of the demand for gold came from investors (as opposed to industry) compared with 40% now. That suggests a dangerously high level of speculation, which could quickly develop into a selling panic like the bursting of the tech bubble a decade ago.

The Bottom Line
It's impossible to predict the future, but there are signs gold has peaked and might even crash in the near future. If you don't own any gold, think twice about buying it now. If you do own gold, ask a reputable financial professional to review your investment portfolio and determine if you need to adjust your position in the yellow metal. (To learn more about trading gold, see A Holistic Approach To Trading Gold.)

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