How Gold Lost Its Glimmer

Long considered to be resistant to economic and market forces, the yellow metal has fallen on harsh days, but still holds promise.

- Anand James

Sleep is my greatest enemy.” This tweet from Reed Hastings, CEO of Netflix, on April 17, 2017, shortly before signing up its 100 millionth customer, has two thought tangents: One, that Netflix is not as much worried about competition from, say, YouTube or Amazon, as much as it is positive about its prospects, given the vastness of the market; two, customers are likely to dump Netflix only if a majority of its content turns bad at once, which looks less probable.

The same could have been said about gold in the noughties. The world was its oyster, with each person a prospective customer. Gold prices then had everything going in their favour. When oil rose, gold also rose, confirming its value as a hedge against inflation. When dollar fell, gold rose, confirming its value as an alternative currency.

When geopolitical tension broke out, gold rose too, confirming its value as a hedge against uncertainty. Year after year, gold prices continued to register gains, giving no signs of letting up, even though they had been going up for one full decade. The yearly gains were modest, though, if you were to compare with equities, but enough to beat inflation, and enough to give a sense of stability that other asset classes failed to deliver.

And with booming populations in China and India, the traditional affinity towards the physical gold as jewellery, coins, etc magnified its demand. Additionally, central banks’ buying gave a floor, while miners’ de-hedging and supply bottlenecks gave more momentum to upsides. In other words, with so many diverse supportive factors pushing demand higher, it was safe to say that gold knew no competitors and was poised to continue edging higher, year after year, for eternity.

And yet, gold prices did crash in September 2011 after hitting a record peak of $1,920.3 per troy ounce. Not only did it crash, gold also broke away from the decadelong trend of registering yearly gains. Why did this happen?