Author Box
Articles Categories
All Categories
Articles Resources

What's Wrong With Gold?

June 08, 2012 | Comments: 0 | Views: 174

While the stock market has been a loser on a buy and hold basis over the last 12 years (the S&P 500 is still 14% below its peak in 1999), gold surged up 625% over the same period, from $255 an ounce in 1999 to its recent high of $1,850 in March. As with each of its previous record highs there was much excitement and widespread forecasts of $2,500 gold by year end, $5,000 gold in the not too distant future.

But this time instead of still higher highs, gold has dropped $300 an ounce.

What's wrong?

The driving forces that were driving it higher have gone away, at least for a while.

For instance, gold is the historical hedge against rising inflation, and the theory has been that the global easy money policies of recent years couldn't help but create an inflationary spiral. But it hasn't happened. Inflation in the U.S., the world's largest economy, remains tame at around 2%. Inflation did pick up in other regions over the last two years, notably China and India, which helped extend gold's bull market. But those countries fought back aggressively against inflation with interest rate hikes and other tightening measures that brought their inflation fears under control. The concerns now are that they went too far and have slowed the inflationary pressures of their strong economies too much, and now face serious deflationary economic slowdowns.

Perhaps surprisingly, gold has also not been perceived as a safe haven in the current time of uncertainty as has often been its history. With the return of the eurozone crisis over the last three months, gold has actually declined, and the perceived safe havens seem to be the U.S. dollar and Treasury bonds.

Demand for gold also depends to a significant degree on the jewelry trade. According to Thomson Reuters and the World Gold Council, over the last five years 12% of gold demand was for use in the manufacture of tech products, 33% from investors, and 55% for jewelry.

And that important demand from jewelry producers is taking a hit. The World Gold Council reports that jewelry market demand for gold fell 2.7% last year, but was more than offset by investor and public buying. Jewelry demand fell 6% year-over-year in the 1st quarter this year. But will investors and the public continue to offset that worsening demand? The All India Gems & Jewelry Federation reports that gold consumers in India, the world's largest importer of gold, are now selling gold "aggressively".

Anecdotally, the stories over the last two years have been about public demand for gold being so high that ATM-like machines dispensing gold coins and bars were becoming a growth industry. However, over the last few months, with people strapped for cash in the newly stumbling global economy, the stories are of people flooding jewelry stores, street-side gold 'dealers', and pawn shops, looking to sell gold coins and jewelry items to raise cash.

Meanwhile, there are two basic types of gold; that which is above ground and in circulation, and that which is still in the ground owned by gold mining companies.

An interesting phenomenon of the last two years has been the divergence between the price of gold bullion and the stocks of gold mining companies. Mining company stocks normally rise and fall in tandem with the price of the product they produce, the bullion, and the un-mined reserves of that product they still have in the ground.

Yet, while the price of gold bullion surged up 31% from $1,415 an ounce in December 2010 to its high of $1,850 in March, the gold mining stocks, as measured by the XAU Index of Mining Stocks, plunged 38% over the same period.

Traders and a number of large hedge funds bet heavily on gold mining stocks over the last year, on expectation that the divergence could not last and the mining stocks would rally sharply to catch up with the spike-up in gold prices. But the mining stocks continued to decline. It's still a popular theory that the mining stocks will eventually have to rise to match the increased price of bullion.

Apparently not being considered is that perhaps the mining stocks, not the bullion, have the value picture right, and the divergence will be resolved instead by the price of gold dropping down significantly to return the relationship between bullion and the gold stocks to normal. That's not a prediction, but is certainly a possibility to consider. My technical indicators remain on a sell signal for gold and I will simply stand aside until they reverse to a buy signal again.

Meanwhile, gold has been very volatile as it has declined from its March high, short-term traders repeatedly jumping in to try to catch the bottom, creating brief rallies. But brief demand from short-term traders is not the type of demand that gold needs for a sustainable rally that would put it back in its previous bull market.

Sy Harding is CEO of Asset Management Research Corp., author of 1999's Riding the Bear and 2007's Beat the Market the Easy Way. Sy Harding is editor of, and the free market blog,

Source: EzineArticles
Was this Helpful ?

Rate this Article

Article Tags:

Mining Stocks


Gold Bullion


Gold Stocks




Sy Harding


Street Smart


Gold Coins

Forex dealing is dealing in currency trading and basically includes dealing in foreign exchange while the stock market dealing is the dealing of stock in a standard market market. The two types of

By: Anil Mali l Investing > Stocks l October 25, 2012 lViews: 245

Investments in silver metal can be done by several ways. The article talks about the best ways of silver investments. Silver, the precious metal has always attracted investors for several reasons.

By: Kyles Humphrey l Investing > Gold Silver l August 17, 2012 lViews: 305

The article offers reasonable reasons for high oil prices. Crude is indispensable and it is a great source of energy. The prices on oil keep on altering, sometimes it is too high and sometimes it

By: Kyles Humphrey l Investing > Stocks l August 17, 2012 lViews: 286

Many investors are unaware of new tax that will be levied as part of the Supreme Court’s decision to uphold President Obama’s health care reform. The investment tax, as it is being referenced,

By: Ben Esget l Investing > Retirement Planning l July 17, 2012 lViews: 405

A few months ago, I was at Starbucks talking to someone about stocks and bonds, he and his wife had worked hard and were worried about the stock market. They wanted something much less risky. He

By: Lance Winslow l Investing > Stocks l July 11, 2012 lViews: 434

The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.

By: Lawrence Tepper l Investing > Retirement Planning l July 10, 2012 lViews: 240

Investments in silver metal can be done by several ways. The article talks about the best ways of silver investments. Silver, the precious metal has always attracted investors for several reasons.

By: Kyles Humphreyl Investing > Gold Silverl August 17, 2012 lViews: 305

Gold investment is basically the use of the mineral gold as a form of investment. In most cases it would be acquiring gold bars, coins, certificates, accounts and other forms to which it would grow

By: Samantha Linl Investing > Gold Silverl July 10, 2012 lViews: 338

In 2010, the hottest metal investment around was gold, but that changed in 2011 when silver once again came into the spotlight. At the beginning of 2012, silver emerged as the early favorite to

By: Philip Albert Edmonds-Huntl Investing > Gold Silverl July 10, 2012 lViews: 313

One of the world's most popular silver bullion coins, the Silver Maple Leaf has been minted by the Royal Canadian Mint since 1988. It is one of the purest silver bullion coins on the market - 1 ounce

By: Les Kendalll Investing > Gold Silverl July 09, 2012 lViews: 223

There are three primary ways to sell gold. Your ultimate satisfaction with the transaction depends on which method you personally find most comfortable.

By: Aaliyah Arthurl Investing > Gold Silverl July 06, 2012 lViews: 209

Gold as a metal has unique properties - did you know that you can beat gold leaf out so thin that it's almost transparent? Also, gold can withstand strong acids that would erode other precious

By: Mike Francisl Investing > Gold Silverl July 05, 2012 lViews: 201

Global economies continue to run out of steam. Europe's and China's central banks provided further monetary easing yesterday that their markets ignored as meaningless, indicating central banks are

By: Sy Hardingl Investing > Stocksl July 06, 2012 lViews: 226

For several months Fed Chairman Bernanke has been assuring Congress that the Fed stands ready with ammunition to re-stimulate the economy "if it becomes necessary". It has become necessary!

By: Sy Hardingl Investing > Stocksl June 01, 2012 lViews: 184

Discuss this Article

comments powered by Disqus