Gold prices have been in a slump these past few months. But investors who own the metal shouldn't be sad.
In fact, quite the opposite. They should be thrilled.
Here's why: Prices for gold futures on the CME's Comex have tumbled more than 14% since the second half of 2016, to $1,173 a troy ounce recently, down from $1,372 in August. The SPDR Gold Shares (GLD) exchange-traded fund, which holds bars of solid bullion, followed the same pattern. It had been down even further until a small rally over the past few weeks.
The pullback comes amid a chronic underperformance for the metal compared to stocks. In the past five years (through early Jan. 5) the SPDR S&P 500 (SPY) , an ETF that tracks the S&P 500, gained 78%, while the SPDR Gold Shares ETF (GLD) lost 27%.
That's a big difference in returns (more than 100 percentage points), but it points to something up lifting for investors.
"Gold is largely a panic asset that you buy when you don't know what else to buy," says Robert E. Wright, professor of political economy at Augustana University. "It means people are selling some gold and buying something else."
Put another way, when investors buy gold, it is often because they want a form of financial insurance.
When things go wrong there is always a ready market for the metal. That is quite unlike some other securities that can be difficult to shift during times of tumult. (If you doubt this, consider how the credit markets ceased to function in the financial crisis.)