There are a number of factors that ultimately led to gold performing so strongly in what turned out to be one of the worst economic events the world had seen in over 80 years. During times of political and economic uncertainty investors turn to gold as a safe haven. With the US Dollar depreciating against most other currencies during the GFC, many investors, including central banks, turned to gold to preserve the value of their capital. Further, with the return from bonds, equities and real estate faltering, gold became more attractive.

However, over the past 12 months gold seems to have lost a lot of its shine. From its peak of $US1921.15 on September 6, 2011, gold has plummeted 35 per cent, trading at $US1,243 per ounce at the time of writing this blog. If that’s not what you call a bubble bursting I don’t know what is.

Increased economic stability, recovering equity markets and signs that the US Federal Reserve is starting to ease off its Quantitative Easing program have all been bad news for the price of gold. In time it is expected that US interest rates will start to rise and, as they do, the US dollar will climb too. This ultimately results in investors switching their allocation from gold to riskier assets including equities.

Proof of this was seen recently when the US Federal Reserve announced its decision to cut its US$85 billion monthly stimulus by US$10 billion. This sent US stocks to record highs immediately after the announcement, but gold fell almost 2% overnight.

So where to for gold?

It’s difficult to predict the plight of gold going forward but you would have to say that in the short term it is not bright.

As explained by my colleague Andrew Hewison in his blog titled ‘What about gold?” back in October 2010 we at Hewison Private Wealth have always struggled to justify investment direct into gold. Aside from the fact its pays no regular income, its price is extremely volatile.

It is interesting that there is estimated to be somewhere between 120,000 and 140,000 tonnes of mined gold in the world. Based on the current price of gold this equates to almost $5.7 trillion. If converted to cash this would provide enough cash to purchase each of the top 10 companies in the world by market capitalisation including companies such as Apple, Exxon Mobil, Microsoft and Nestle and still have around $3 trillion in spare change.

I don’t know about you but I know where I would prefer to have my money invested.