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Why Gold and Silver Are Losing Their Luster

As the bull market continues on, one asset class continues to underperform: precious metals.

The iShares Silver Trust (NYSEMKT: SLV  ) , which tracks the price of silver, is down more than 30% in the last year. The SPDR Gold Trust ETF (NYSEMKT: GLD  ) is down by nearly 19%. A tracker for the S&P 500 is up more than 19%, dividends excluded.

The reason is simple: metals are now more expensive to buy and hold.

GLD Chart

More expensive?
Gold and silver are effectively hedges. Goldbugs would say they're hedges against hyperinflation, the death of the U.S. dollar, or a hedge against a global economic collapse.

Gold and silver might serve that purpose.

But it's not necessarily fear -- or a lack thereof -- that's sending precious metals lower. It's their holding costs.

Gold and silver are, by all definitions, "dead money." They produce nothing. No earnings, nor dividends. And if you own metals through an ETF like the SPDR Gold Trust or iShares Silver Trust, you slowly lose metal to the annual management fee.

Interest rates are to blame
A common case for gold or silver is low interest rates will stoke inflation, lifting prices for metals. Higher rates would be anti-inflationary, and thus have a negative effect on gold and silver prices.

The impact of higher rates goes beyond inflationary concerns, however. Higher rates make gold and silver more expensive to own. Before the big plunge in metals last May, the 10-year U.S. Treasury Note yielded about 1.7%. Today, yields sit at 2.73%.

Every dollar deployed in the iShares Silver Trust or the SPDR Gold Trust is a dollar that isn't creating earnings, dividends, or interest payments. Placing cash in 10-year U.S. government bonds generates coupons worth 2.7% over and over again.

As interest rates move higher, asset managers and ordinary investors have to ponder higher return hurdles for precious metals, it becomes increasingly harder to justify positions in negative-carry commodities.

The Fed seems content with a slow taper which would gradually push interest rates upward. As rates trend up, gold and silver will likely continue to trend down.

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Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On March 28, 2014, at 1:42 PM, brykanewk wrote:

    gold and silver losing luster? what about your still positive stance on wprt since its drop from 27 to 15 . could you make a report on this drop as to why you didn't see it maybe sell ands re-buy at a lower level?

  • Report this Comment On April 08, 2014, at 5:12 PM, wengem wrote:

    The 10-year treasury note yield increased from 2.5% to 3.4% between 2009 and 2011 while gold climbed to its $1900/oz peak. Then yields dropped for the next two years while gold and silver also dropped. It's not a causation, but rather one of probably 100 factors influencing the price.

  • Report this Comment On April 23, 2014, at 4:49 PM, regotoguy wrote:

    Interest rates are a factor and the scenario is rates will be low for many years. I would buy silver over gold for the simple reason that silver is cheap on an historical ratio to gold.

  • Report this Comment On April 29, 2014, at 2:20 PM, OnTheContrary wrote:

    This is one of the silliest financial articles I've ever read, and suggests a psychopathic disconnect with the real world.

    In the real world, as opposed to the world of commodities trading, where most traders are bone ignorant about the chits they trade,

    concerning themselves only with technicals and other psychological trading factors, silver is purchased for jewelry, for industrial

    purposes, and yes, as a long term inflation hedge, and an alternative to the rapidly depreciating fiat currencies of the world, playing

    second fiddle to gold in that respect.

    On the supply side, silver is mostly mined as a byproduct of copper and other base metals, and when industrial

    demand for base metals languishes, silver supply drops off which balances out any drop in industrial demand for silver. As a result, silver

    supply is expected to be flat for 2014, and as several of the largest base metal mines are about played out, supply is expected to further

    drop over the coming years.

    Meanwhile jewelry demand for silver is burgeoning, and industrial demand for silver is also exploding in places like China, whose demand

    for silver for solar panels has exploded from .2% of the world market in 2009, to about a third of the world market today.

    As for silver as a long term inflation hedge and an alternative to fiat currencies, the US mint is having trouble keeping up with the

    continued growth in demand for silver coins; 2013 was a record year in that respect, and 2014 is set to surpass it. Actual inflation in

    the US, contrary to the heavily doctored CPI that measures it at < 2% a year, has been running at 5-10% per year since 1990, as the 1990

    CPI, which is tracked by economist John Williams on his ShadowStats website shows. Wealthy Wall Street traders are completely out of touch

    with what's happening to rest of America, as the number of jobs continues to decline, and the middle class falls farther behind every year.

    However, in spite of the constant propaganda about too low inflation, many ordinary people are figuring things out by the seat of their

    pants and buying gold and silver, just as they did in the late 1970s. We are going through a rerun of that era now.

    This article is even wrong about the ETFs it's focused on, at least for silver. Silver ETFs have seen inflows in recent months. It

    appears to me that silver is in all the traders doghouses (at least I have yet to see a single bullish call on silver in the financial

    press - which is a classic contrarian indicator). I put the inflows down to the real "smart money" buyers: the little guys who are trading

    some of their depreciating Monopoly money for something real, and universally valued, regardless of its utility.

    In the context of all these factors, the 2.7% of so-called risk-free interest offered by Treasuries is nothing but laughable, and to

    suggest that the leveraged traders who rule and manipulate the commodities markets give a damn about 2.7% interest is just ludicrous.

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"The liabilities are always 100 percent good. It’s the assets you have to worry about." - Charlie Munger

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