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Mr. Market Squishes Gold Bugs as Stocks Decline

By Travis Hoium - Apr 12, 2013 at 3:33PM

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Gold drops off a cliff.

Stock markets have fallen modestly today after reaching record highs over the past few days. The Dow Jones Industrial Index (^DJI -3.57%) is down 0.13% in late trading, and the S&P 500 (^GSPC -4.04%) has dropped 0.38%. But the real fireworks were in the commodities market, where gold fell 4.2% and oil dropped 2.5% by 3:15 p.m. EDT.

The Fed is discussing the end of quantitative easing, and the stock market continues to rise, so the "safe haven" that gold bugs find comforting is getting a little less attractive by the day. A commodity like gold can quickly plummet when traders decide to sell: There's little fundamental use for gold, so it trades based more on sentiment and fear than on fundamental supply and demand, unlike other commodities.

Oil fell after the Thomson Reuters/University of Michigan consumer sentiment reading for April dropped to 72.3 in April from 78.6 in March. This is just a preliminary reading, but it's the lowest since last July, and it shows that the economy could be weakening.

Alcoa (AA) has followed the drop in commodities, falling 1.5% today. Alcoa beat earnings estimates by a small margin earlier this week, but investors are taking a cautious approach to the stock now that we're past earnings. The company is fighting fear of an economic slowdown, as well as fear of a bear market for commodities, and those two factors will hang over the stock until economic conditions improve.

On the flip side, Home Depot (HD -5.24%) has rallied 2.3% after the company was upgraded by an analyst at Jeffries. This upgrade isn't a long-term driver of the stock, but it can bring in short-term buyers and help reinforce your investing thesis. The analyst thinks home investments will look attractive to home owners who are weary of low-yield, fixed-income investments and new record highs on the stock market. It was also announced that HD Supply has filed for an IPO. This former subsidiary of Home Depot is majority-owned by private-equity investors, but the 12% ownership stake Home Depot still holds could give the company an infusion of cash.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,490.07 (-3.57%) $-1,164.52
Alcoa Inc. Stock Quote
Alcoa Inc.
AA
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$285.18 (-5.24%) $-15.77
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,923.68 (-4.04%) $-165.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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