Why Are Gold and the Dow Both Falling Today?

Recently, the gold market has often moved in the opposite direction as the stock market, with the Dow Jones Industrials (DJINDICES: ^DJI  )  setting more than four dozen highs in 2013 even as the yellow metal plunged to its lowest levels in years. The Dow was down 55 points as of 1:30 p.m. EDT, but that pullback from Thursday's pre-holiday record wasn't enough to get gold investors excited: The SPDR Gold Trust (NYSEMKT: GLD  ) fell nearly half a percent and the iShares Silver Trust (NYSEMKT: SLV  ) declined almost 1%. Even if you don't pay much attention to gold prices, following the gold market can offer useful insight into what's happening with the Dow Jones Industrials and the remainder of the stock market.

Are the stars aligning for gold?
The fallout in the gold market over the past couple years has been tough for long-term gold investors to take. After more than a decade of consecutive annual increases in the price of the yellow metal, gold prices plunged in 2013. While the SPDR Gold Trust and iShares Silver Trust have regained some ground so far in 2014, they still languish far behind the Dow Jones Industrials over the past two years.

GLD Chart

Dow and metals data by YCharts.

Historically, the relationship between gold and the stock market has gone through different phases. Sometimes the two move in opposite directions, as gold's role as a safe-haven investment and as a fighter against inflation tends to gain in prominence when the Dow Jones Industrials and other stocks are suffering from unstable market environments and rising costs. At other times the two move more in lockstep, as favorable economic conditions like an accommodative monetary policy supports both markets.

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

In 2014, we've seen both of these sets of factors at work supporting the gold market. Signs of inflationary pressure have popped up at the wholesale and consumer levels. Geopolitical risk has been on the upswing, with major confrontations in Ukraine and Iraq reaffirming the tenuous relationships among the most important nations in the world. Yet the Federal Reserve has seemed slow to remove its favorable monetary policy, and so gold investors have been able to sustain their positions without paying more in futures-related and spot-related borrowing costs.

What's ahead
Today's declines in gold and silver are insignificant from a long-term perspective, but they also indicate investors' anticipation of changing conditions. The Fed this week will release the latest minutes from its monetary policy-setting committee; investors will look for signs that the central bank will raise rates faster than expected. A rise in short-term rates will boost gold traders' costs to finance their positions, and that often leads to a sell-off in the gold market. The Dow could also stumble if this rate spike happens much sooner than current projections.

In the long run, though, the Dow and precious metals likely have different roads to follow. While the Dow is hanging on to a long bull market, gold and silver investors have something to prove -- and that could make the precious metals markets a lot more interesting for the rest of 2014.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

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 July 07, 2014, at 1:43 PM, tomofsnj wrote:

    I believe history has little meaning with the flooding of the financial markets by the Federal Reserve. The comex allows unlimited shorting so it is a joke to expect a market bases on limited supply would exist honestly when the imaginary supply of that product which is the shorts is unlimited. I think we are now facing a major implosion of the fiscal markets and hopefully the end of the organization with bank in its name and is not a bank and not federal but a private corporation which does not want common controls like audit to apply to them.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3019828, ~/Articles/ArticleHandler.aspx, 10/24/2014 11:54:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement