1 Dark Horse Postponing Gold's Rally

How the U.S. shale revolution is postponing gold's rally, and when that might change.

Jul 13, 2014 at 9:30AM

Few investors understood why gold prices and the SPDR Gold Trust (NYSEMKT:GLD)stopped rallying in 2011. It just didn't make much sense at the time as the Federal Reserve continued quantitative easing and the U.S. continued to report wide fiscal and trade deficits. But now with the benefit of hindsight, it is safe to say one major factor for gold's decline has been the U.S. shale revolution.

The U.S. shale revolution has had a positive effect on the economy. Because of the advances in horizontal drilling and hydraulic fracturing, domestic oil and gas production has soared. The increased production has in turn indirectly created half a million new jobs, increased government revenues, and reduced the trade deficit. 

Those positive effects have also arguably postponed gold's rally by capping two factors that determine gold prices: the severity of the budget and trade deficit and inflation expectations. The extra government revenue from shale drilling has reduced the federal budget deficit while lower oil imports have reduced the U.S. trade deficit. Given that energy and food expenditures account for 10% and 15% of the chained consumer price index, respectively, the stable oil price made possible by the shale boom has also put a lid on inflation. 

Although the shale revolution had started before 2011, when gold prices were still rallying, the effects were not significant enough to impact gold prices. Now, given that North Dakota alone produces more oil than OPEC member Qatar, it is safe to say that the extra shale and tight oil and gas production matters in a big way. And given that the U.S. Energy Information Administration expects domestic oil production to continue to increase until 2016, the shale revolution may continue to matter for several more years. 

That being said, while the shale revolution has had an effect on gold, the price of the yellow metal does depend on other factors. As unemployment falls and the economy heats up, the velocity of money will likely increase, causing inflation to rise despite the cooling effect of the shale revolution. Gold miners like Barrick Gold Corp (NYSE:ABX) and Goldcorp (NYSE:GG) can also do well even if gold remains range-bound as long as the companies cut costs and increase efficiency. Gold miners do not necessarily have to lose in order for domestic oil and gas independents to win. 

But it is fair to say that the strength of the shale revolution is a reverse leading indicator for gold prices. If the U.S. shale revolution continues full steam ahead, gold's rally may have to wait a couple more years before inflation and the twin deficits become a problem again. If the shale revolution weakens prematurely, however, look for the price of the yellow metal to rise.

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.

Jay Yao has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers