For years now, gold and other precious metals have given investors an answer to the Lost Decade for the stock market. Yet over the past year, the once straight up movement in precious metals prices has given way to uncertainty, volatility, and plenty of competing opinions about the future of the sector.
Regardless of whether you subscribe to Warren Buffett's opinion that the world's gold holdings are far inferior to stocks with a similar value, or whether you believe that gold is the best way to preserve wealth in a world gone mad with government largesse, there's one thing everyone can agree on: Precious metals have posted impressive gains over the past few months. Let's take a closer look at what's behind those gains and whether they're likely to continue.
First, the facts:
Bullion prices are up across the board. The SPDR Gold Shares ETF (NYSE: GLD ) has jumped more than 10% since late June, while the iShares Silver ETF (NYSE: SLV ) have soared more than 25% over the same timespan. Platinum and palladium have also seen similar moves.
For a long time, small mining companies saw their shares sink dramatically, with losses much worse than those of bullion prices. Finally, though, some of those junior miners are rebounding strongly. Primero Mining (NYSE: PPP ) has more than doubled since late June, while First Majestic Silver (NYSE: AU ) has gained nearly 50%.
Even relative giants in the industry have notched solid rebounds. For example, streaming company Silver Wheaton (NYSE: SLW ) has ridden higher silver prices to a 40%-plus gain in the past two-and-a-half months.
Clearly, investors have renewed their appetite for precious metals and mining stocks. But what's behind the move?
"I find your lack of faith disturbing"
If Darth Vader were running the world's central banks, you might not hear as much open skepticism about their policies. But the imbalances that central bankers have introduced to the financial system justifiably have investors nervous, and many of those investors believe that gold and other precious metals represent the best way to profit from the trends that could hurt other investments.
One of the most troubling trends lately has been the Federal Reserve's control of the Treasury market. According to Bloomberg, the Fed now owns 34% of the total amount of outstanding Treasury debt with maturities between 10 and 20 years. For seven different individual Treasury issues, the Fed has reached its self-imposed limit of 70%. With another round of quantitative easing potentially coming as early as later this week, further monetary accommodation could reawaken fears of competitive devaluations around the world -- a trend that would potentially send hard asset prices through the roof.
Supply constraints are also starting to play a role in the industry. With platinum and palladium, recent labor problems involving South African platinum group metals producer Lonmin sparked a big rally in the group. Meanwhile, many gold miners are facing higher costs. That partially explains why their shares have been under pressure recently, but in the long run, the prospective restriction in production levels would support further moves up for bullion prices.
Can the good times last?
Beyond the core of longtime precious metals investors who remain convinced of the metals markets' long-term bullish direction, many players in gold and other metals tend to be opportunistic in their investments. As a result, momentum often plays a big role in when investors buy and therefore when minor trends evolve into major trends.
With prices still well below the record levels that gold and silver set last year, though, the metals have a lot further to run before many participants would consider them overpriced. Right now, macroeconomic factors seem to be pushing metals toward that critical test, and if gold can set new highs, the wave of investor interest could create a brand new leg to the decade-long bull market in metals.
If you like investing in precious metals, we've got a stock you should really take a look at. Read the Motley Fool's latest special report on gold to discover the tiny gold stock digging up massive profits. It's free but only available for a limited time.