Will a Rising Dow Keep Crushing Gold?

The Dow Jones Industrials (^DJI 0.69%) have been kind to investors recently, with the average today falling just short of setting a seventh record high for the year. Yet even as investors have been willing to take on greater risk in the stock market, they've essentially given up on what had been the longer bull market in precious metals, as gains for SPDR Gold Shares (GLD -0.25%) and other gold-tracking investments earlier in 2014 have largely evaporated.

Source: Gold Footpath by George Hodan.

Gold actually surprised most investors with its strength at the beginning of the year, as most had anticipated that the gradual tapering of bond-buying activity under the Federal Reserve's quantitative easing program would spur gold investors to sell off their holdings. But gold jumped almost $200 per ounce to start 2014 before upward momentum died out, and even as interest rates have fallen to unexpected lows, the yellow metal has fallen back below the $1,250 level.

Source: Kitco. As of 4 p.m.

The news from the mining industry has been even worse, as many stocks have actually lost ground after gold's recent retreat. Barrick Gold (GOLD 1.64%) and Newmont Mining (NEM 0.67%) are among the biggest mining stocks to drop this year, with both companies reeling to some extent from their failed merger attempt. The difficulty that Newmont and Barrick had in negotiating a potential combination shows just how challenging it is for miners to join forces, especially during tough times when industry players believe their assets are undervalued by the market at large. Yet it's hard for shareholders to feel comfortable with Barrick and Newmont arguably leaving billions of dollars of potential cost savings and economies of scale on the table.

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

Why you should care
It's easy to dismiss the precious metals market as a niche sector that you can easily avoid. Many well-known investors believe gold isn't even an investment, pointing to its inability to generate income or to grow. The problem with that assessment is that miners aren't the only companies that rely on a healthy gold industry. Those companies that supply mining equipment to Barrick Gold, Newmont Mining, and others in the industry -- and those suppliers include some well-known members of the Dow Jones Industrials -- have taken big hits from the plunge in precious metals. Dismissing the impact of gold on the rest of the market is dangerously shortsighted.

In the short run, the gold market will look closely at the European Central Bank to see if further stimulus moves for Europe's economy could spur a rebound in the yellow metal. Nevertheless, gold's early 2014 attempt to restart its bull market appears to have failed, and given the success that the Dow Jones Industrials and other stock markets have had, few investors appear interested in gold. Without some unexpected cataclysmic event that sends people scurrying for safety, gold could have a tough time holding on to its current level -- let alone regaining its former glory.