The Dow Jones Industrials (DJINDICES: ^DJI ) closed up for the fourth-straight trading session on Tuesday, gaining 69 points as investors celebrated a strong U.S. economy and the prospects for continued increases in business activity and consumer confidence. Yet the gold market didn't participate in the day's rally, with the SPDR Gold Shares (NYSEMKT: GLD ) falling more than 2% as the price of gold dropped $25 per ounce to $1,267. With so many things going against the gold market right now, it's hard for investors to have much confidence in the prospects for the yellow metal, at least in the short run.
Gold's big fall
Gold has had to deal with a number of challenges recently. The Federal Reserve continues to withdraw from its quantitative easing program, moving closer step by step toward tighter monetary policy that traditionally has been problematic for gold prices. Although interest rates remain relatively low, most investors expect them to rise as the Fed tightens, and that increases the cost of owning physical gold or gold-linked ETFs such as SPDR Gold Shares. With the Dow Jones Industrials paying more than 2% in dividends, going without income is increasingly a sacrifice.
Indeed, the latest signs from professional gold investors seem to confirm the fear of Fed action. In the most recent report of futures contract activity among large institutional gold investors, bullish positions in gold fell, with speculators instead favoring the much more attractive platinum and palladium markets. With platinum-group metals tying demand to strong industries like the automotive sector, their prices have held up far better than gold, with palladium at its best levels in more than three years. The situation in the silver market is even worse than gold, with professional investors being net-short in their silver positions.
Perhaps most troubling, though, is the attitude that surrounds gold right now. On one hand, Wall Street firms have started stepping away from their presence in the commodities markets, not wanting to deal with the heightened regulatory requirements and scrutiny that their commodity operations face. Moreover, Barclays (NYSE: BCS ) got hit last week with a $44 million fine by regulators in the U.K., in connection with allegations of gold manipulation two years ago. By eroding confidence in the gold market, these episodes just make it less likely that investors will use SPDR Gold Shares as part of their overall asset allocation. By contrast, although some have questioned stock market trading practices, most people are comfortable with how the Dow Jones Industrials trade on a day-to-day basis.
Market participants aren't necessarily expecting better prices. Barrick Gold (NYSE: ABX ) recently indicated it might try to restart its stalled Pascua-Lama mine, which it initially shelved last October due to controversy and the plunge in gold prices. Moving forward forward would suggest Barrick's willingness to boost production even without a recovery in prices of the yellow metal.
Gold isn't doomed to underperformance forever, but for now, most of the trends favoring the Dow Jones Industrials aren't helping gold. Metals with a more direct tie to the strength of the U.S. economy have a better chance at climbing in the long run.
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