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TheStreet Open House

Gold Might Test the Lows of Its One-Year Price Range

NEW YORK (TheStreet) -- Gold has long served as portfolio insurance against political and economic shocks.

Many investors stocked up on gold in the wake of the financial crisis of 2008, eventually driving it to an all-time high of $1,920.76 an ounce in September 2011. But the yellow metal later saw a decline of nearly 39%, falling to $1,180.26 in June 2013.

Does this mean that gold's strong run has ended and the yellow metal has lost its precious shine as a safe haven? The answer to this is not straightforward, and various factors play a role in answering this question.

Read More: Jobs and the Economy: What Today's Numbers Mean

Is Gold Still Worth It?

For general investors it is important to understand what gold brings to a portfolio. To put it simply, it is a perfect hedge against economic uncertainty. Investors become nervous during periods of uncertainty and shy away from assets such as stocks and bonds but turn toward gold. Gold is the perfect insurance policy against inflation, and investors should consider putting about 7% of their portfolio into the precious metal.

It is important to note that investors become nervous and invest in gold after periods when financial markets are flooded with credit and supported by asset price inflation. Both trends were in place before the 2008 financial crisis, and these trends tend to signal that a bullish run in gold is coming.

The U.S. Federal Reserve has kept the federal funds rate at a low level for years and has engaged in quantitative easing with the aim of preventing deflation and spurring economic growth. But much of the stimulus has been channeled into equities, boosting the stock market, while some areas of the economy haven't recovered as well as many had hoped.

As of June 2014, the unemployment rate has yet to fall below 6.1% and the U.S. inflation rate has increased to 2%. Although the inflation mark is still within an acceptable range, the all-time high S&P 500 and the unemployment figure indicate an increased probability of a significant correction in the stock market.

Is Gold About to Experience Another Bull Run?

Though the yellow metal had a bearish run last year, much of the downward pressure had been due to the rally in the stock market. It's a common norm: When something goes up, something else comes down.

The equity market flourished at the expense of gold. But would it be correct to say that the new highs in the stock market were a result of a truly improved economy? Clearly, that's not the scenario. Consumer sentiment has not yet increased up to a satisfactory mark. The U.S. economy is still weak.

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