The Gold Rush Is Over and Gold Bugs Know It

Gold bugs had a rough 2013 and with the Federal Reserve slowing its monthly bond-buying program from $85 to $75 billion monthly gold's favor has likely run out. The thesis that drove gold and the $34 billion SPDR Gold Shares (NYSEMKT: GLD  ) popularity have run their course and the result is a fast abandonment of a supposed safe asset.

GLD Total Return Price Chart

GLD Total Return Price data by YCharts

Here's why gold is down so far in 2013 and why I think 2014 will be another bad year for gold.

Rampant inflation never showed up
In the late 2000s, there were multiple reasons investors thought inflation would soon be out of control and gold was the best hedge against that inflation. The federal government was spending more than a trillion dollars each year that it didn't have, which of course would eventually lead to printing money to pay down debt. Worse yet, the Federal Reserve was pumping money into the economy to keep interest rates low and the more dollars there are floating through the economy the less each dollar is worth.

On the surface, both arguments make a lot of sense. The problem is that neither rings true forever and inflation that gold investors expected never actually showed up.

US Inflation Rate Chart

US Inflation Rate data by YCharts

In fact, the inflation rate is currently so low that the Federal Reserve has to be worried about deflation, which would be devastating to the economy.

The falling dollar never fell
All of this money printing should have also led to a sharp decline in the value of a dollar. Over the past decade, the U.S. Dollar Index is down, but it's only down 8.7%.

^DXY Chart

^DXY data by YCharts

It's also being crushed by the Dow Jones Industrial Average's return. One of the reasons is that the dollar is considered a safe haven for investors, so its value is boosted in rough times. Again, this thesis for why gold is so valuable didn't play out.

The hedge against everything and nothing
Some people will tell you that gold is a great hedge against a bad economy, a falling dollar, inflation, government deficits, a falling stock market, or other investments. The truth is that gold isn't really a hedge against any of those things. Like a dollar, it only has as much value as the market puts on it.

When markets are panicking, there can be a high value on gold, but long-term it's not really a hedge at all because historically it hasn't moved in the opposite direction as inflation. It's just spiked during recessions and then settled into a long-term lull.

Miners will suffer in 2014
As the price of gold falls, the profit of gold miners will suffer. I showed above that shares of Goldcorp Inc. (NYSE: GG  ) and Barrick Gold Corporation (NYSE: ABX  ) have plummeted in 2013 and next year I expect more of the same.

Goldcorp had all-in sustaining costs of $992 per ounce  last quarter and Barrick Gold has costs  of $916 per ounce. Neither price leaves much room for error in 2014. Gold is now $1,216 per ounce, so a 20% decline next year would leave both companies with nearly no net income.

All gold miners will face the same challenge in 2014, and that's why I'd stay far away from their stocks.

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Read/Post Comments (29) | Recommend This Article (9)

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  • Report this Comment On December 29, 2013, at 2:09 PM, Romulan wrote:

    Gold Rush over? I don't think so. I do know however that the FEDERAL Reserve is putting all its guns into killing the gold and silver markets.

    While this goes on, Gold leaves the vaults of the west, headed for the Far East. Say goodbye to our country's stash :(

  • Report this Comment On December 29, 2013, at 2:26 PM, badge0913 wrote:

    This author doesn't have a clue !! Gold and silver will always be sought after, not just in consumable goods, but as REAL MONEY. My suggestion to this author .. "go back to school".

  • Report this Comment On December 29, 2013, at 2:42 PM, BurtsDog wrote:

    Hmm. I do not think the gold bugs in any way, shape or form believe the gold rush is over... so there is the writer's first mistake. His second mistake is making the assumption that because the dollar has not fallen that it will not fall. It may take another 2-5 years but the threat is still very real. So, both sides have actually been wrong and both sides have been (to a degree) right. Just goes to show you that investing is not that easy. You can be right in the long run but very wrong in the short run, and that can hurt you in the real world.

  • Report this Comment On December 29, 2013, at 2:46 PM, junktex wrote:

    I still like gold/silver over paper.

  • Report this Comment On December 29, 2013, at 3:02 PM, Pakirk53 wrote:

    Why does Motly use a guy that covers solar, renewable and gaming for source content on Gold?

  • Report this Comment On December 29, 2013, at 3:20 PM, moeginsburg1 wrote:

    the name of your co is good Fool

    to say that gold or silver hasn't keep up with inflation is just wrong here is a example. silver when gas was 30 cents a gal back in the day today it is about 3.50 a gal .today 3 dimes pre 1964 are worth about 1.23 each even at this very low silver price so if you sold them you would get $3.69 more then a gal of gas think again .and remember when there is no interest in gold or silver stocks that is when the smart money gets in not the fools who will stay away remember rick reward is always the smart play.one more thing the fools seem to have no idea what the fed has been doing to all markets fixing the price to fit their agenda .the day will come when people realize that the paper market is worth nothing and look for the real thing only to find out that it is all in CHINA .THAT IS WHY IT IS TAKEING 7 YEARS FOT FED TO GIVE BACK GERMENYS GOLD so they need to keep the price down so they can by it Mr. Hoium Motley FOOL

  • Report this Comment On December 29, 2013, at 4:00 PM, shineridge wrote:

    Balony !!!!! Gold is REAL money. Always has been, always WILL be. I've heard that big banks have been snatching up Gold like crazy, as have Governments around the world. The price of Gold has been SUPPRESSED by financial CRIMINALS in high places. I believe their sinister plan is to buy up lots of Gold while the price is suppressed (while telling the "sheeple" that Gold is junk), then, when the Gold suppression is lifted, and values shoot WAY back up, they (the financial crooks) will own most of the Gold themselves. The criminal Elite get even richer.

  • Report this Comment On December 29, 2013, at 4:06 PM, jph42 wrote:

    This is why I canceled my membership with motley fool. If they would have said gold was going down the tubes at the beginning of 2013 that would have meant something. Easy to write negative articles after the fact. Motley fool must be short gold cause all articles lately have been negative as gold has started to form a bottom and come back a bit. They obviously got in too late. Now is actually the time to by some beaten down miners that have the balance sheet to weather this storm. They should recommend a few. The strategy is to buy low and sell high after all. NEM is a good pick. I remember when motley fool was pumping buy zipcar, buy zipcar. If you did when they said too you still lost a bunch of money even after the buyout.

  • Report this Comment On December 29, 2013, at 4:11 PM, shineridge wrote:

    More damned LIES : inflation is tame. BS !!!! inflation is RAGING at 9%-11%. Anyone who thinks there's no inflation is either a cold blooded liar, delusional, or they NEVER shop. Another LIE : the dollar hasn't fallen. The dollar has been LOSING value (purchasing power), non stop since 1913, when the ILLEGAL Fed was created !! And since the 1970's, the dollar has been in a BIG time decline. Now, thanks to QE, with the Fed creating boatloads of dollars (out of thin air), it's only a matter of time before this creates a TSUNAMI of inflation. That inflation hasn't hit yet, but it's on its way !!!!!

  • Report this Comment On December 29, 2013, at 4:30 PM, MoneyWorksforMe wrote:

    Bad timing for such an article. HUI is terrible oversold, and I mean that in the sense that mining stocks are basically cheaper now than at any point over the past 10 years.

    GLD outflows have been the only significant source providing the market with physical supply due to weak hands selling their shares to jump into the stock market. When shares are sold GLD custodians have to sell physical gold bullion. This appears to be slowing quite considerably. If this trend continues, we should expect that this alone will be enough to propel gold price far higher next year, as physical demand remains very strong.

  • Report this Comment On December 29, 2013, at 4:42 PM, LongHaulInvestor wrote:

    I knew there would be a slew of gold bugs upset with this article.

    Shineridge - About the inflation rate - It is a totally transparent calculation that is done monthly. Any business school intern can replicate it - and many do for a class exercise. If the administration were fudging the numbers every month from 10-11% (as you say) to 1.2% (current year over year) don't you think at least one of these eager ambitious kids wanting to make a reputation would pop up and point that out. After all these are BUSINESS school kids (not likely to be a unified pro-Democrat block.) But I guess if you're a conspiracy theorist... Perhaps the rest of the conservative world is not bright enough to see through this Administration's error and point out their math error?? Or maybe your anecdotal sampling of prices is different than a systematic sampling? Just asking...

  • Report this Comment On December 29, 2013, at 4:51 PM, LongHaulInvestor wrote:

    No matter what you all say, the price of gold is about where it was in the early 1980's. Even in the depths of the greatest stock market crash in our lifetimes, the stock market never got below about 10X its price in the early 1980's. It's now about 20X. Put another way, in the early 1980's, gold was about $800 an ounce and the Dow hovered around 800. To get back to equivalence, gold would have to rise to $16,000 per ounce to match the current Dow at 16,000. This doesn't even include dividends. If you want to take it a step further, stock dividends average about 2-2.5% per year, meaning in 30 years, if you had invested in an index fund and the Dow had been FLAT, you would have doubled your money JUST ON DIVIDENDS! (Please tell me where my math is wrong...) Justifying long term investment in gold can only be done by those who have had a long term investment in gold. i.e. you need to selectively pick and choose which facts to believe.

  • Report this Comment On December 29, 2013, at 5:23 PM, duuude1 wrote:

    The comments above suggests that "...Gold Bugs Know It" is not quite right :)

    Let's just look at some numbers. Every dollar invested in gold at the start of 2013 is now worth $0.70 due to the 30% loss. Every dollar invested in stock indexes for the year is now worth $1.30 due to the 30% gain. So the actual loss from investing each dollar in gold this past year - instead of in diversified stocks - is $1.30 - 0.70 = $0.60. That's a 60% opportunity loss from choosing gold instead of stock index.

    Let's try this calculation over the past couple years. Gold price peaked in 2011 at close to $1900, and is now at $1200, which is a 37% loss. In the same period, S&P500 went from about 1130 to 1841 today, which is a 63% gain.

    Most people other than die-hard gold-bugs can't afford to give up a 63% gain in S&P in exchange for a 37% loss in gold. Most people need to invest in stocks. The vast majority of people made just that decision which you can see in the gold price today.

    Diversified stocks will continue to perform well in the years to come. Most people will make the same decisions as in 2013 to invest in stock indexes instead of gold. Gold will continue to decline, perhaps slowly, perhaps quickly, who knows. I'm betting that it will go down towards the neighborhood of $600. Bottom line is that neither I, nor most people, can afford to be in gold. That lost opportunity is a disaster.

    Duuude1

  • Report this Comment On December 29, 2013, at 5:44 PM, chipmanmike wrote:

    I think inflation will hit big.....eventually it has too with decades of billions of federal deficits.

    No way would I walk away from precious metals now.

  • Report this Comment On December 29, 2013, at 6:12 PM, mdemers wrote:

    Now's not the time to sell gold stocks. They're at historic lows. The idea is to buy low and sell high.

    The Fed hasn't stopped printing money and the government hasn't stopped increasing the federal debt. $75 billion a month isn't chump change and only a slight drop from $85 billion. So the Fed's balance sheet is now approaching $4 trillion. And the federal government debt is now over $18 trillion.

  • Report this Comment On December 29, 2013, at 7:27 PM, abcpanther wrote:

    This motley IS a fool! Metals are suppressed. Gold is bought in record numbers in China, Russia, and India. Germany wants it's gold back. Record number sales in Silver Eagles, so much so that they stopped shipping from the mint early. The stock market is propped up by the fed...and this clown says that Gold is out of favor!?!?! The only gold that IS out of favor is "Paper" gold like GLD. If you want it, you must "own" it. That means hard assets!

  • Report this Comment On December 29, 2013, at 7:35 PM, Mega wrote:

    Is it just me or are all of the charts broken?

  • Report this Comment On December 29, 2013, at 8:25 PM, fazsha2 wrote:

    Inflation hasn't shown up? Really? Argentina, 10.54%. Brazil 5.77%. India 7.52%. Russia 6.5%. Indonesia 8.37%. True, China's is only 3%, and the official inflation rates in Europe, the US, and Japan are low, but gold is a global money, and you can bet they are buying gold elsewhere. What the author is contending is that countries can issue bonds with abandon, and that it will never show up in the gold price. I'll keep my gold, thank you.

  • Report this Comment On December 29, 2013, at 8:40 PM, tomofsnj wrote:

    The reaason why inflation did not show up is they lied. Tonight NBC reported many will see huge increases in medical cost starting Jan or a couple days. The official report has a lot of new strange rules like substitution. That nice but it does not measure inflation which is purchase power of the currency. The drop in the dollar did not show up because all central bankers have been flooding new fiat currency. The federal reserve bank alone has purchased close to a trillion last year with no money which is a way of buying on credit card and not paying.

    Stock price increased 30 percent but some who that increase in prices is not in 'THERE' inflation reporting.

    Gold will decline for a short period then return as no nation has it and no one will want the others paper.

  • Report this Comment On December 29, 2013, at 8:48 PM, tomofsnj wrote:

    'Germany Abandons Inflation Angst With Merkel Offering New Agenda'

    Sorry on second posting but after post i read this. If German goes for flooding the currency then the weak nations will go wild. This is a real disaster in the work for fiat money

  • Report this Comment On December 29, 2013, at 9:22 PM, LOSMTJohn wrote:

    Yes, right now the dollar is strong and gold seems to be taking it on the chin. The key phrase is "right now." If you take the long term view, the argument that flooding the market with dollars will devaluate the dollar is valid. Yes there will be ups and downs.

    People saying good things about the dollar love to say "See. Look how well the dollar is doing against the Dollar Index." The problem is that the dollar index simply compares the dollar to several other currencies, heavily weighted toward the Euro.

    When I hear this argument I'm reminded of the story of the Clock tower attendant and the radio announcer. The attendant listens to the radio and sets his clock by the time announced on the radio. The radio announcer looks out the window at the clock tower and announces the time based on what the clock reads.

  • Report this Comment On December 29, 2013, at 11:41 PM, joshuarayborn wrote:

    Keep on stacking real money!

    You go ahead and invest in fake fiat money and bitcoin.

    I will stick to the real stuff.

  • Report this Comment On December 30, 2013, at 2:22 AM, WillieC wrote:

    Creating credit isn't inflationary until said credit chases goods or services into scarcity. Likewise, a mountain of credit sitting unused in bank reserves isn't inflationary; in fact, to the extent it doesn't move -- even when prodded -- said credit is deflationary.

    Substitute 'paper dollars' for credit; substitute 'gold' for credit sitting banked in reserves, and -- voila! -- you have the fiscal years between 2010 and 2013.

    Note to self: Gold's an investment. Dollars are a medium of exchange; use Dollars to invest wisely.

  • Report this Comment On December 30, 2013, at 2:57 AM, norsky wrote:

    good maybe theyll stop pillageing the third world for a while

  • Report this Comment On December 30, 2013, at 6:07 PM, tree207 wrote:

    Over history gold has held monetary worth.

    I would invest in some physical gold to have an asset that i know could be always be negotiated.

    However, one must remember that the physical gold itself does not earn interest.

    Money can be made (and lost) speculating in gold .

    I just saw WillieC's post -dec 30,2013, 2:22 AM. I agree with his post, so what I was going to write would not be as concise as his statement.

  • Report this Comment On December 31, 2013, at 5:26 PM, terryshead wrote:

    This guy is bonkers, if you believe the inflation these governments put out get into the real world the dollar is screwed like most of these currencies, qe does that, where do you go from here, Swiss franks which is backed by gold.

    Terry Shead

  • Report this Comment On December 31, 2013, at 5:47 PM, xetn wrote:

    I believe the Fed has been creating a bubble in stocks through their creation of money out of thin air which has to go somewhere. While much of the new money has ended up as excess reserves at the Fed. a lot has undoubtedly ended up in stocks and probably real estate.

  • Report this Comment On January 01, 2014, at 4:56 PM, xetn wrote:

    By the way, who can explain JPMorgan taking delivery of 5 million troy oz of silver? This while being short 13000 (65 million troy oz) of silver.

  • Report this Comment On January 04, 2014, at 8:09 PM, AleBrewer wrote:

    The FED in concert with the bullion banks will continue to manipulate the price of gold down until the FED buys enough to meet their obligation to return the Bundesbank gold.

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