Why Nobody Cares About Gold Anymore

The stock market tanked in August and September; gold barely flinched. Terrorists attacked Paris on Nov. 13; gold declined. Turkey shot down a Russian jet earlier this week; gold fell close to five-year lows.

All year long, gold has been struggling, with seemingly bullish events unable to lift prices for the precious metal. Gold is now down 9% this year and 44% from its all-time highs set in 2011. It seems like nobody cares about gold anymore. What's going on?

Gold Price (2011 to present)

No Impact From Geopolitics & Stocks

It's actually quite easy to understand why gold hasn't reacted to the various headlines that have been in the news. Contrary to popular belief, there is no historical precedent for the yellow metal to rise due to geopolitical events or stock market downturns.

For example, there was no noticeable uptick in gold due to the Sept. 11 terrorist attacks on New York City. Likewise, there was no lasting bullish impact on gold due to the October 1987 stock market crash or the bursting of the tech bubble in the early 2000s.

Rather, gold has tended to take its cues from other factors, which have a much more significant impact on underlying demand for metal.

The First Great Bull Market

One of those factors is quite obvious: inflation.

The classic case of inflation driving gold higher took place four decades ago, when growth in the Consumer Price Index hit double-digit levels in the U.S. in the mid-70s and early-80s. In response, gold skyrocketed from around $100/oz to a then-record $850 between 1976 and 1980 before crashing back down after Fed Chairman Paul Volcker managed to tame inflation by jacking up interest rates.

The 1970s rally in gold was the first of the two great bull markets for the yellow metal since the ending of the Bretton Woods system and the de-linking of gold from the dollar in 1971.

After gold peaked in 1980, prices entered a long bear market that lasted for the next 20 years.

Gold Price (1971 to 2000)

The Second Great Bull Market

Unlike the first great bull market, the second great bull market in gold had many different drivers. Those included the advent of gold exchange-traded funds; rapid growth in demand from China and India; the shift in central bank demand from net selling to net buying of gold; and fears that quantitative easing (QE) would lead to runaway inflation.

With multiple legs to stand on, the second great bull market in gold lasted for a whopping 12-straight years, sending the metal from around $250 to as high as $1,921 in 2011.

However, in the next few years, most of gold's bullish drivers began to falter, sending prices sharply lower. Investors dumped their gold exchange-traded funds―which had accumulated 84 million ounces of the metal between 2004 and 2012; China's economy began to slow dramatically; and QE never fueled the runaway inflation that many had feared.

Only central-bank buying continued strong, even until today.

Gold Price (2000 to present)

Looking Ahead

Gold is on track to finish 2015 with its third-straight annual loss. Is this the start of a 20-year bear market like the one that followed the 1980 peak?

No one knows exactly what lies ahead, but there's little reason to expect gold to spike any time soon, barring a major turnaround in demand fundamentals.

China's economy continues to slow; ETF investors have no incentive to buy; and inflation is nowhere in sight. The dollar's relationship with gold is murky, but in any case, rapid appreciation in the greenback certainly doesn't help the yellow metal.

If the last bear market is any indication, gold could continue to fall. All said and done, the yellow metal fell about 70% peak-to-trough following the 1980 peak. A similar decline this time around would put prices around $575, nearly half of current levels.

Editor’s note: ETFs tied to gold include the SPDR Gold Trust (GLD | A-100) and the iShares Gold Trust (IAU | A-100).

Contact Sumit Roy at [email protected].