Looking for Gold in the Valley?

The gold price peak in September of 2011 marked the end of a sustained four-year period where gold-related investments like iShares Gold Trust  (NYSEMKT: IAU  ) , SPDR Gold Shares  (NYSEMKT: GLD  ) , IAMGOLD  (NYSE: IAG  ) , and the Market Vectors Gold Miners ETF  (NYSEMKT: GDX  ) absolutely destroyed the market:

IAU Chart

IAU data by YCharts

But since the end of that bull run, things have played out in a decidedly different way:

IAU Chart

IAU data by YCharts

The strong performance of the market following the "Great Recession" has left gold in the dust as investors fled the perceived safety of gold to get in on a recovering equity market. So here we are today, with the market still near all-time highs, and plenty of uncertainty to go around. Is this shades of 2008, or is it really different this time? Let's take a closer look.

Gold mining is really tough
Gold mining is one hard, dirty business, challenged by much more than just the price of gold. 

IAG Chart

IAG data by YCharts

Gold mines are located in extremely remote places, almost always without any underlying electric grid for miners to utilize. And as you can see above, oil prices are relatively flat since September 2011, while gold has fallen nearly one-third. Simply put, this isn't a good combination for growing profits. And most importantly, don't read too much into what's going on with things like the government shutdown, or the talk about interest rates increasing, and automatically assume that these things will lead to a recovery in the price of gold, helping to lift miners back up as the gap between energy costs and gold prices narrows.

Speaking of which...
Gold prices are largely a product of investor speculation. Back in 2007, the economy was on the doorstep of the worst event since the Great Depression. This created a perfect storm of sorts that sent investors flocking to gold in droves over the next few years. However, as the market and economy recovered, leading us to where we are today, it truly is a different situation. There's little reason to predict a global economic meltdown happening in the near term. While far from perfect, the domestic and global economy is in a much more stable place today, specifically the financial markets that devastated the economy. 

Foolish bottom line
As I mentioned above, much of the price of gold is based on investor speculation. Without the massive uncertainty that the Great Recession caused, there's just no reliable way to draw a line between gold being down, the stock market being up, and expect it to cross over market-beating returns in gold, or gold miners for the foreseeable future, especially with input costs like gas and oil predicted to remain high for the foreseeable future. 

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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 October 09, 2013, at 1:49 PM, onesideoranother wrote:

    Jason Hall is a true optimist, I like that about his article. Comments about the world being stable are unfounded though. Not sure I would call 16 trillion dollars of debt stable. Neither would I call 85 billion dollar per month of Fed support from the monetary printing presses stable. When the support from the Fed stops and the newly printed dollars hit the economy your optimism will turn to sadness. This is a opera with a very large curtain that is hiding the true picture of inflation in our country and the world. When opera star sings the next time it will bring a world of hurt to the optimists like Jason that are talking people into bad investments. Our economy can not triple or quadruple to support our monetary habits. It is like Facebook with and many Motley Fool stocks that have extremely high P/E ratios. When the bubble bursts the opera star may make sounds that are very unkind to your ears. Wake up!

  • Report this Comment On October 09, 2013, at 4:20 PM, kickaz4911 wrote:

    Amen to you Onesideoranother! Your point very well made, and well taken.

    David Buckwitz,Hazel Park,Michigan,USA.

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