Gold has had a drop of about 30 percent since it hit its all-time high price in August 2011, when it traded more than $1,900 per ounce.
That 30 percent drop is not the worst bear market drop for gold ever, as it declined 39 percent in a long bear market that lasted from Jan. 2, 1996, to Aug. 25, 1999. We are officially in a deep bear market for gold.
It’s interesting that the term “bear market” originated in California during the gold rush days. In those days they would round up a wild bear and a bull, and the miners would put them in a pen together and watch them fight.
The bull would strike up at the bear with his horns and the bear would rise up on his haunches and strike down at the bull with his paws.
So, the term “bull market” means that it is going up and the term “bear market” implies that the market is on a downtrend.
Gold can be a good investment and it can help provide diversification and can act as an inflation hedge in a portfolio. Gold has increased in price every year for the last 12 years. This year should be different unless the price increases dramatically in the next five months.
Gold is also important to our local economy, as about 80 percent of the US’s gold is produced in our neighboring state, Nevada. Mining is the number two industry in Nevada, second only to gaming. Gold is also a major export product for the US. In 2011, we exported 488 metric tons of gold.
There are several major gold mining companies operating in Nevada. Barrick Gold is the largest and has a market cap of about $16 billion. Most of Nevada’s gold comes from what is known as the Carlin trend, which is about five miles wide and 40 miles long.
Nevada’s gold is very low grade, which means that you need to mine a lot of ore to produce one ounce of gold. Currently gold has to be priced at about $600 per ounce to be profitable.
It’s impossible to tell whether these low prices are a buying opportunity for gold and gold mining stocks or whether we’ll see a long term bear market.
Investors with gold holdings can always consider using some hedging strategies to protect positions from further declines.
Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.