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Why Precious Metals Are Shining Again

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.

Glittering brightly
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.

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Fool contributor Dan Caplinger likes heavy metal of all kinds. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned in this article, although he does own bullion coins in all four metals mentioned. The Motley Fool owns shares of Primero Mining. 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 Fool's disclosure policy always shines.

Read/Post Comments (2) | Recommend This Article (10)

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 September 12, 2012, at 11:15 AM, Jellywig wrote:

    Dan, awesome use of a darth vader quote. Keep em coming! The force is strong with you... And thanks for the commentary. I appreciate a lot of your articles and have to thank you for pointing me to Chris B who has helped my Roth IRA tremendously with his great precious metals picks such as SLW and PPP.

  • Report this Comment On September 18, 2012, at 2:19 PM, rfaramir wrote:

    Close on First Majestic Silver's ticker symbol. It is AG (i.e., chemical symbol for silver) instead of AU (i.e., chemical symbol for gold)

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10/25/2016 1:07 PM
AU $13.93 Up +0.42 +3.11%
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PPP $1.57 Up +0.03 +1.95%
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SLW $24.47 Up +0.62 +2.60%
Silver Wheaton CAPS Rating: ****