Can Gold Price Regain Its Luster?

London (Sept 18)  The set-up to today's markets is well understood and has been widely documented. Emerging markets have grown increasingly vulnerable this year as USD financing has dried up, making it harder to roll over new debt and finance current account deficits. Meanwhile, U.S. markets have continued showing strength despite a bull market that is in its tenth year. Rising interest rates, a ballooning fiscal deficit and the possibility of substantial trade dislocations continue lurking as an overhang to the aging bull.

With investors becoming mindful of these growing risks, it is reasonable to ask why gold continues to perform so poorly. Since topping in late 2011, the precious metal has underperformed the S&P 500 by a significant margin.

Different factions tend to give different answers as to gold's attractiveness and those factions' answers also tend to have little to do with the current price of gold.

Some assert that gold should always be a substantial part of a portfolio because of the unreliability of central banks and debt-financed economies. Others, while skeptical of gold's long-term investment potential, suggest a 5%-10% weighting in gold as a hedge against market turbulence and inflation. Finally, a third broad group belittles the concept of gold as an investment altogether regardless of its price because it lacks intrinsic value relative to productive assets.

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