Fool's Gold Report: Gold Takes Double Hit on Fed, Russia; Why Aren't Caterpillar and Joy Global Crashing?

Gold's recent rise proved short-lived, as bullion prices crashed back down below $1,300 as two pieces of news affected the gold market negatively on Wednesday. First, Fed Chair Janet Yellen gave testimony about the health of the U.S. economy, cautioning that investors shouldn't rely on low interest rates lasting indefinitely, and recommending that they rein in any speculation tied to rates, which sent SPDR Gold Shares (GLD -0.01%) falling almost 1.5% and hurt other bullion investments. Also, Russian President Vladimir Putin said that Russian troops had pulled away from the nation's border with Ukraine, raising hope that the conflict might end with a peaceful resolution. Predictably, that hurt mining stocks, with most major gold miners falling 1% to 3% Wednesday. Yet, mining-equipment makers Caterpillar (CAT -0.41%) and Joy Global (JOY) were actually up on the day, in an apparent disconnect with the bullion market.

The impact of Russia
Of the two major news stories today, Russia is the more important, because it was the least predictable. Many believed that economic sanctions against Russia would create a spike in the price of commodities, especially platinum-group metals like palladium for which Russia is a major producer. With the likelihood of more draconian sanctions falling, platinum-group metals miner Stillwater Mining (SWC) fell almost 2% today, and losses in the platinum and palladium bullion were on a par with, or worse than, gold's drop.

Clearly, the situation in Ukraine is still fluid, and just because Putin has fallen back today doesn't mean that he won't advance tomorrow. But whatever happens, today's drop in gold prices points to how fragile the precious-metals markets are right now, suggesting that the fundamentals supporting the gold market simply aren't as strong as they once were.

Image sources: Wikimedia Commons; Creative Commons/Armin Kubelbeck.

Mining equipment stocks improve
Given the dour outlook for precious metals, you'd expect that companies that make equipment to help miners produce those metals would also be faring poorly. But Caterpillar and Joy Global both gained on the day. For Caterpillar, the explanation is relatively simple: because the company has substantial exposure to construction equipment, as well as mining equipment, improving economic conditions in the residential and commercial construction markets have helped support Caterpillar, even as poor results from the mining side of the business hold the company back. Caterpillar has also made a big restructuring plan that should help it weather the downturn in the area, cutting costs, and making it less unprofitable.

Joy Global, on the other hand, has underperformed Caterpillar, but it has still fared relatively well in recent months. The answer for Joy Global is that coal production appears to have hit bottom and could bounce again, especially if natural gas prices continue to rise. Coal won't help precious metals, but it's an important part of Joy Global's demand for mining equipment. In addition, Joy Global has been able to boost service-related revenue as owners seek to extend the working lives of their existing equipment.

The key lesson here is that diversification can help companies survive tough times in certain industries. By not being completely exposed to the mining market, Joy Global and Caterpillar are in better positions than a more-concentrated company would be.

How metals moved today
Gold dropped sharply on Wednesday, with June gold futures falling $19.70 per ounce to settle at $1,288.90. July silver futures fell more than $0.30 per ounce, to $19.34, while platinum and palladium both dropped substantially, as well.

Source: Kitco. As of 4 p.m.

Unless Ukraine hits a setback, today's drop in gold could continue for the foreseeable future. With so much of gold's gains having come from geopolitical risk, a Russian resolution could crush gold's recent bounce higher.