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Why Isn't Gold Soaring?

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The Dow's been down five days in a row. The situation in Europe is more uncertain than ever, with a Socialist president elected in France and surprisingly strong election showings from Neo-Nazi and Communist party groups in Greece. The economic recovery in the U.S. and elsewhere throughout the world faces big threats as emerging-market economies slow down, and many believe that the Fed and other central banks would likely respond with even more stimulus if a new recession appears imminent.

Yet with these and other fears dominating the news, gold and other safe-haven precious metals don't seem to be doing their job. The SPDR Gold Shares (NYSE: GLD  ) have lost 10% of their value since late February, while the iShares Silver Trust (NYSE: SLV  ) has fallen 20%. That leaves one question for investors: Why isn't gold soaring?

The frustrations of gold
Unfortunately, in looking for guidance on this question, it's hard to get definitive answers. Various reports from gold-tracking sources suggest different things going on in the gold market:

  • As bad as things may seem, some point to the fact that geopolitical tensions have been worse in the past than they are now. Perhaps most importantly, the situation with Iran seems to have faded into the background, as oil prices have fallen below the $100-per-barrel level.
  • From a pure supply-and-demand perspective, some analysts point to low levels of buying interest from coin dealers who serve the general public. The threat of a European recession in particular could hurt gold demand across the continent. Even though gold demand in China is still high and central banks are buying gold, ETFs like the SPDR Gold and iShares Silver vehicles aren't pulling in the amounts of money they did in the past when prices were rising sharply.
  • Some governments are taking measures to restrict flows of gold across borders. For instance, although India now expects to remove the 1% excise duty on jewelry, it will keep a proposed 4% import duty on gold -- which is double the previous amount.
  • Finally, many traders in the gold market rely on technical indicators to make buying and selling decisions. Lately, those indicators have stood in the way of further gains, pressuring gold prices and creating a general bias away from higher prices.

Go with stocks instead?
Perhaps more surprising is the even weaker performance of gold stocks. Many investors criticize direct investment in gold bullion as being unproductive, but gold stocks are money-creating businesses that aim to make a profit mining valuable metals at costs less than what they can sell those metals for on the open market.

Fool gold expert Christopher Barker notes that this isn't the first time that gold investors have suffered price drops that seem unwarranted. Even in light of falling bullion prices, drops of 30% in silver-streaming company Silver Wheaton (NYSE: SLW  ) and 25% at Yamana Gold (NYSE: AUY  ) seem completely out of whack. Look at the performance of smaller miners in the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) and you'll see even worse showings from some promising companies.

With rising costs throughout the industry and company-specific problems that mining ventures inevitably run into, Barker points out that some gold-stock declines make perfect sense. Still, massive moves in the gold and silver markets in response to rapidly changing government and central-bank policies don't always seem to match up with what you'd expect.

One longer-term source of worry comes from the support that gold has gotten from the long-held low-interest rate environment that has made financing for gold positions easy to obtain and maintain. If a recovery economy pushes rates higher, then that underpinning of the gold market could go away as marginal investors choose to move into income-producing investments like stocks and bonds.

Going to extremes
The gold market inspires extreme opinions. Recently, one gold expert called for prices to go to $10,000 per ounce, while another cited $50 an ounce as his target. Most of the time, less dramatic calls win out.

But as with any other long-term investment, buying gold requires you to make an assessment of the industry's dynamics independent of short-term influences. That's difficult to do with everything that's going on in the world that affects gold, but if you can do it, then you'll have an edge in sticking with your convictions while others make short-sighted moves that could well prove to be huge mistakes in the long run.

We've got a gold stock that deserves a closer look. Read The Motley Fool's latest special report on gold to discover the tiny gold stock digging up massive profits. It's free but only available for a limited time.

Fool contributor Dan Caplinger has owned his share of precious metals for years. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is as good as gold.

Read/Post Comments (8) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 09, 2012, at 10:07 AM, JeanDavid wrote:

    This is one point of view as to why gold is not soaring.

    "gold is a currency that competes with government currencies and has a powerful influence on interest rates and the price of government bonds. And that's why central banks long have tried to suppress the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power."

  • Report this Comment On May 09, 2012, at 10:44 AM, XMFGortok wrote:

    Gold is not an investment in the traditional sense -- it's a hedge against inflation. Or, as Gary North pointed out, it's protection against uncivilized actions by civilized governments: inflating the money supply by fiat.

  • Report this Comment On May 09, 2012, at 10:50 AM, EricTheRon13 wrote:

    Looks like you're ignoring the obvious cause of gold's downturn: probable recession and even deflation in Europe, especially if the Euro banks have a "Lehman moment". Since they're already insolvent--and LTROs are only keeping them liquid, not making them solvent--further devaluation of the sovereign bonds on their books is going to make their insolvency impossible to ignore. With the sovereigns unable to borrow more money to prop up their banks--except Germany of course, who won't--we're likely to see either a breakup of the Euro currency or outright defaults by either banks or sovereigns. Either way, there will have to much worse to come when there are no more "kick the can down the road" options, in order to work this out. All roads lead to austerity.

    For gold, there is also the fact that most of these sovereigns have quite a gold stockpile. In an emergency--and having to exit the Euro currency will certainly qualify--they would probably have to use it. That prospect of the gold market getting flooded will certainly lower the speculative price.

  • Report this Comment On May 09, 2012, at 10:58 AM, tommylad wrote:

    Read my lips: Manipulation!

    Also read articles by Bob Chapman (International


  • Report this Comment On May 09, 2012, at 11:31 AM, XMFkmoney wrote:

    This is such a good example of the folly of technical analysis.

    Two things that could affect the price of gold.

    1) International elections which threaten the stability of the Euro

    2) The 50 day moving average crossed the 200 day moving average.

    How can someone seriously argue the second is more important than the first? Except for the head and shoulders pattern. That one is totally true.

    And as for people who think gold is being manipulated, can you please point to any time in history where gold was not being manipulated? I feel like there should be a 2,000 year statute of limitation on that argument. I would rethink any bets based on the fact that sometime in the future the price of gold will no longer be manipulated.

  • Report this Comment On May 09, 2012, at 12:51 PM, JeanDavid wrote:

    "as for people who think gold is being manipulated, can you please point to any time in history where gold was not being manipulated?"

    Not offhand. If I were trying to find such a time, I would start my search during the dark ages because then people were so poor that most did not have any money at all. Therefore, such governments as there were would have no need to inflate the money supply.

    Even more recently than that, in Venice, before the city-states were combined into the nation of Italy, some people were counterfeiting the gold Ducats. What was interesting is that the counterfeits contained the full weight of gold. The problem the counterfeiters were solving was that there was not enough money and the duke did not see fit to make more, even though the gold was available.

  • Report this Comment On May 09, 2012, at 4:12 PM, talan123 wrote:

    Gold is a great currency backer, not the only one but a good one, but when it comes time to actually get something done you are going to need cash.

    The buying up of gold in the last few years due to the gold bugs is kind of scary. They put a lot of money into the gold because they were after a good investment and it's turning sour so they are going to unload it. Last year or so Gold is up only 10%, though the last six months are down 10%. The central banks of the world have tens of thousands of tons of gold which they can liquidate. Until the financial crisis is over and Europe is done messing around, gold will go down.

    People are investing in currencies so they have ample liquidity and the United States is turning out to be the most reliable. Despite all of it's issues, it's the least likely to go bad because it's it's tried and true.

  • Report this Comment On May 11, 2012, at 8:10 PM, metallockbox wrote:

    I'm 84 years old and have held gold coins when they were priced at $35.00 per oz and now have no intention of dying and cash in out of fear, since gold, as part of my will, will be passed on to my children and grandchildren to insure a modicum of solvency for their future. It's a grim future before rhem and precious jewels but, primarily gold will be their lifesaver.

    I recommend to all those who won't keep their gold because of short time manuiplations, read the new, second edition of "Aftershock." The next global financial meltdown. When the dollar bubble breaks, you would wish that you had gold in your lockbox.

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