Another Lousy Week for Gold

For years, the cure to a shaky stock market has been investing in gold and other precious metals. But recently, the stability of gold prices in the face of declining stock prices has disappeared, leaving investors with one less safe haven to turn to when stocks misbehave. Will gold bounce back, or are its best days now behind it?

Gold isn't shining
The past week was particularly hard on precious-metals investors. Here's a quick look at the highlights:

  • Gold prices fell through the $1,600-per-ounce level, finishing down almost 4% on the week at $1,581. The SPDR Gold (NYSE: GLD  ) ETF's performance was in line with the move in gold's spot price.
  • Silver did even worse, plunging through the $30 price point to close at $28.87, down more than 5%. iShares Silver Trust (NYSE: SLV  ) fell a similar amount, and the gold and silver closed end fund Central Fund of Canada (AMEX: CEF  ) finished the week with a 4.5% loss.
  • Platinum and palladium both followed gold and silver down, as the economically sensitive metals likely dropped because of concerns about a global economic slowdown that could hit demand in key areas like the automotive industry. ETFS Physical Palladium (NYSE: PALL  ) was down 8% on the week, while ETFS Physical Platinum (NYSE: PPLT  ) had a milder 4% loss.

Gold-market followers pinned the moves on a combination of factors. Weak economic data from China weighed on commodities generally, while the big trading loss from JPMorgan last week apparently threw some overall uncertainty into just how stable traders' markets like commodities really are.

Keeping your perspective
One interesting element in the precious-metals markets is how different investors have had completely different experiences with their investments. Depending on when you bought in, your returns may vary greatly from other gold investors.

For instance, since last summer, metals prices have fallen off a cliff. When gold hit $1,900 an ounce in August, $2,000 seemed like a foregone conclusion, and that promise drew many investors in. Yet those gold owners are sitting on substantial losses at current prices.

Silver has gone through an even more painful downdraft. Since peaking near $50 per ounce in late April, silver has never fully recovered from the ensuing harsh correction. Platinum and palladium have seen similar moves as predictions of a stronger economic recovery seem to go in and out of favor.

But for longer-term investors, even a major correction has only put a small dent in the multiyear uptrends for gold and silver. As recently as August 2010, silver traded for less than $20 an ounce. A 40% gain in two years is impressive -- even if it represents a big drop from past paper gains. Gold has seen the same general price action, having risen from below $1,000 per ounce just since late 2009.

Focusing on fundamentals
Skeptics point to poor performance from mining companies as evidence that the bullish run in precious metals is unsustainable. Yet in many ways, the challenges that miners are dealing with prove that fundamentals in the industry favor high prices. Rising costs make it less profitable to mine gold, which could eventually lead to decreases in supply and further upward price pressure for bullion.

The challenge with pricing any commodity -- or any other investment, for that matter -- is that in the end, it's only worth what someone else is willing to pay for it. That has led some investors to avoid the precious-metals arena entirely. But whether it's for jewelry, industrial use, or investment, precious metals have been in demand for millennia -- and despite the big drop in prices in recent months, there's no reason to think that everyone's going to decide gold and its fellow metals are worthless anytime soon.

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Fool contributor Dan Caplinger knows that lousy weeks can be buying opportunities. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article, although he does own bullion in all the metals mentioned here. The Motley Fool owns shares of JPMorgan Chase. 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 shinier than gold.


Read/Post Comments (16) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On May 14, 2012, at 2:04 PM, TheDumbMoney2 wrote:

    "For years, the cure to a shaky stock market has been investing in gold and other precious metals. But recently, the stability of gold prices in the face of declining stock prices has disappeared,...."

    False premise alert. Pretty sure without looking it up that: 1) gold got shellacked in late 2008 along with all stocks; 2) gold has not really even outperformed the S&P much since the 3/9/2009 S&P lows.

    Stability? Your momma! ;-)

  • Report this Comment On May 14, 2012, at 3:28 PM, TMFGalagan wrote:

    @TheDumbMoney2 -

    I was speaking more generally. But in late 2008, gold fell in the summer, soared in September and early October as the market started to fall, plunged in late October and early November, then recovered all of its 2008 losses in December. It then climbed into late February, just before the stock market set its lows.

    And sure, with the perfect hindsight of picking your date, I agree, stocks beat gold's performance since the 2009 S&P bottom.

    best,

    dan (TMF Galagan)

  • Report this Comment On May 14, 2012, at 3:51 PM, XMFkmoney wrote:

    @TMFGalagan

    It sounds like you could put some numbers behind that claim.

    Was the price of gold inversely correlated to the stock market (i.e. the cure to a shaky market)? Is the price of gold still inversely correlated?

    I'm sure a lot of people would be interested in that.

  • Report this Comment On May 14, 2012, at 4:01 PM, TMFGalagan wrote:

    @XMFkmoney -

    There's an interesting chart from Factor Advisors that the Reformed Broker blog linked to.

    http://www.thereformedbroker.com/wp-content/uploads/2012/01/...

    Page 2 of the PDF has annual correlations for the past 10 years for gold versus the S&P 500.

    I'd argue, though, that you don't need inverse correlation, merely weak correlation. Inverse correlation would make owning large amounts of either asset unnecessary - the inversely correlated assets would effectively cancel each other out.

    best,

    dan (TMF Galagan)

  • Report this Comment On May 14, 2012, at 4:30 PM, XMFkmoney wrote:

    Isn't your point about the way inversely correlated assets cancel each other out exactly what you do when you're worried about risk (i.e. a shaky stock market). The story you seemed to be telling in your intro is that buying gold offset the risk of the market. (which is not empirically true and why TheDumbMoney2 called BS on you).

    So...

    If gold moves in the same direction as the market then I'm not offsetting my risk.

    If gold has no correlation then I'm not offsetting my risk either. I would have no idea what was going to happen in this case because there's no expected relationship.

    On that note, here's the money line from the link you sent.

    "Although gold is sometimes categorized as a “risk off” asset with a flight‐to‐quality story, its historical correlation with stocks averages zero.  Despite several months of strong negative correlation in 2011, gold’s correlation with large‐cap U.S. stocks finished the year at +0.23."

    As I read this, there is no evidence that "the cure to a shaky stock market has been investing in gold" or that "the stability of gold prices in the face of declining stock prices has disappeared"

  • Report this Comment On May 14, 2012, at 5:22 PM, topbeancounter wrote:

    Once you get past the value it has when used in business, it's a fear bet. I love that Cramer thinks you need it in your portfolio. If you fear the future, then he's right, if not, then he's wrong.

    Don't let the facts cloud your brain. I'll be buying about the time it reaches around $1,100. Otherwise, I'll let others hold the fear bet and collect no dividends....silly sheep.

  • Report this Comment On May 14, 2012, at 5:27 PM, talan123 wrote:

    I saw estimates being put out at $2250 at this site when it was at around $1800 and when I posted that it was probably not reach that height, I had a comments calling me uneducated and an idiot. I can only admit to the latter.

    I think gold is going to continue to go down against the dollar. The Fed is the only trusted currency manager, look at Europe and China, which means the demand for dollars is going to go up. People and banks want to be able to use their assets in an emergency.

    The bubble seems to be popping.

  • Report this Comment On May 14, 2012, at 5:29 PM, talan123 wrote:

    Gold is now at $1,555.00 an ounce.

  • Report this Comment On May 14, 2012, at 5:57 PM, SwiperFox wrote:

    @talan123

    "The bubble seems to be popping."

    ...and, as with most bubbles, the word from the Gold Believers for the last few years has been "it's different this time!"

    The last couple of years have been a fine time to sell precious metals. I sold silver at $40 and never looked back.

  • Report this Comment On May 14, 2012, at 9:20 PM, Wade32ru wrote:

    We'll see what happens with the price of gold. To me, gold is the global anti-fiat currency. So, although it is weak right now, it doesn't mean it will stay that way. Will the Fed keep printing? Yes. Will the ECB keep printing? Yes. I'd say the case for gold is pretty bullish here. But then again, gold can burn you - and burn bad. I'm long otm long-dated calls on GLD and GDX.

  • Report this Comment On May 14, 2012, at 10:18 PM, talan123 wrote:

    Gold is not anti-fiat.

    Gold's only value is that people believe it is worth something. It has become a fiat metal. There central banks around the planet that can release tens of thousands of tons of gold whenever they feel like.

    Gold should be a hedge against inflation and not much more because of said belief. Since Europe is in it's second recession and China is slowing down, we are going to experience Deflation because it's every country for themselves.

    If a global financial meltdown does happen, gold won't be as a smart bet as water fillters will be.

  • Report this Comment On May 14, 2012, at 11:55 PM, lowmaple wrote:

    If you have doubts or even fears some diversification into gold etc is worthwhile. But it could flounder for some time before something happens to send it higher so real estate (somewhere) or stocks could out perform gold till then. Just because it has increased does not mean it is going to in the near future.

  • Report this Comment On May 15, 2012, at 10:44 AM, rfaramir wrote:

    "fiat metal"??? I do not think that word means what you think it means.

    Fiat currencies have value because someone with guns says they do. They have practically no intrinsic value. Even the value of the (usually non-wood) paper they are printed on is hurt by the presence of the ink on them (i.e., they'd be somewhat useful to write on if blank).

    There is no such thing as a "fiat metal" because no one on earth is powerful enough to say "let there be gold" and create more gold out of thin air.

    While everything on a free market has just the price that everyone else thinks it has (the market clearing price), they think it is worth that price for a reason. The reasons are subjective to each person, but they are real. Some actually are jewelry or electronics manufacturers who want to use the gold in production. Others, knowing that some people really want it for itself, plus knowing that gold keeps really well, buy it now speculating that they can unload it later when they need purchasing power for their specific, future, currently-unknowable needs.

    This is its speculative, anti-fiat aspect. Everyone wants to hold some cash balance for future purchasing, with the exact level different for each person and changing over time. But holding fiat currency long term is a guaranteed losing proposition, so for the portion of your cash balance which is long term, hold gold or silver, instead.

    How much is up to you, but the amount is probably not zero, ideally.

  • Report this Comment On May 15, 2012, at 4:44 PM, TheDumbMoney2 wrote:

    I think the entire idea that gold has in recent years been a "cure" to a shaky stock market is a canard. Gold participated along with stocks in a huge run in the years up to the financial crisis, has exhibited extreme volatility since that time as well, and has underperformed stocks, with equal or greater volatility, for large stretches of time. The only "cure" for the shaky stock market in the last few years has, ironically, been Treasury Bonds, IMHO.

  • Report this Comment On May 15, 2012, at 5:01 PM, dragonLZ wrote:

    >>Fiat currencies have value because someone with guns says they do<<

    This is not true. You are just being dramatic (and fiat currency hater). Does someone with guns decide what all the currencies are worth on a daily basis or does the free market do that? You think U.S. can say tomorrow (because it has guns), dollar is worth 3 Euros?

    Fita currencies backed by guns are valued more than what they are actually worth is maybe what you wanted to say.

    >>Fiat currencies have value because someone with guns says they do. They have practically no intrinsic value. Even the value of the (usually non-wood) paper they are printed on is hurt by the presence of the ink on them (i.e., they'd be somewhat useful to write on if blank). <<

    Are you trying to say gold has intrinsic value? A piece of yellow rock?

    If your answer is, both fiat currencies and gold have no intrinsic value, then I agree.

  • Report this Comment On May 15, 2012, at 5:22 PM, Mega wrote:

    "The challenge with pricing any commodity -- or any other investment, for that matter -- is that in the end, it's only worth what someone else is willing to pay for it."

    False. When you buy a savings bond, there is no secondary market. What other people are willing to pay for it is irrelevant. Similarly you can hold any bond to maturity and not worry about what anyone else is paying for it.

    Intrinsic value does exist in financial markets on a cash basis, it is not all in the eye of the beholder.

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