Why Isn't Gold Soaring?

The Dow's been down five days in a row. The situation in Europe is more uncertain than ever, with a Socialist president elected in France and surprisingly strong election showings from Neo-Nazi and Communist party groups in Greece. The economic recovery in the U.S. and elsewhere throughout the world faces big threats as emerging-market economies slow down, and many believe that the Fed and other central banks would likely respond with even more stimulus if a new recession appears imminent.

Yet with these and other fears dominating the news, gold and other safe-haven precious metals don't seem to be doing their job. The SPDR Gold Shares (NYS: GLD) have lost 10% of their value since late February, while the iShares Silver Trust (NYS: SLV) has fallen 20%. That leaves one question for investors: Why isn't gold soaring?

The frustrations of gold
Unfortunately, in looking for guidance on this question, it's hard to get definitive answers. Various reports from gold-tracking sources suggest different things going on in the gold market:

  • As bad as things may seem, some point to the fact that geopolitical tensions have been worse in the past than they are now. Perhaps most importantly, the situation with Iran seems to have faded into the background, as oil prices have fallen below the $100-per-barrel level.
  • From a pure supply-and-demand perspective, some analysts point to low levels of buying interest from coin dealers who serve the general public. The threat of a European recession in particular could hurt gold demand across the continent. Even though gold demand in China is still high and central banks are buying gold, ETFs like the SPDR Gold and iShares Silver vehicles aren't pulling in the amounts of money they did in the past when prices were rising sharply.
  • Some governments are taking measures to restrict flows of gold across borders. For instance, although India now expects to remove the 1% excise duty on jewelry, it will keep a proposed 4% import duty on gold -- which is double the previous amount.
  • Finally, many traders in the gold market rely on technical indicators to make buying and selling decisions. Lately, those indicators have stood in the way of further gains, pressuring gold prices and creating a general bias away from higher prices.

Go with stocks instead?
Perhaps more surprising is the even weaker performance of gold stocks. Many investors criticize direct investment in gold bullion as being unproductive, but gold stocks are money-creating businesses that aim to make a profit mining valuable metals at costs less than what they can sell those metals for on the open market.

Fool gold expert Christopher Barker notes that this isn't the first time that gold investors have suffered price drops that seem unwarranted. Even in light of falling bullion prices, drops of 30% in silver-streaming company Silver Wheaton (NYS: SLW) and 25% at Yamana Gold (NYS: AUY) seem completely out of whack. Look at the performance of smaller miners in the Market Vectors Junior Gold Miners ETF (NYS: GDXJ) and you'll see even worse showings from some promising companies.

With rising costs throughout the industry and company-specific problems that mining ventures inevitably run into, Barker points out that some gold-stock declines make perfect sense. Still, massive moves in the gold and silver markets in response to rapidly changing government and central-bank policies don't always seem to match up with what you'd expect.

One longer-term source of worry comes from the support that gold has gotten from the long-held low-interest rate environment that has made financing for gold positions easy to obtain and maintain. If a recovery economy pushes rates higher, then that underpinning of the gold market could go away as marginal investors choose to move into income-producing investments like stocks and bonds.

Going to extremes
The gold market inspires extreme opinions. Recently, one gold expert called for prices to go to $10,000 per ounce, while another cited $50 an ounce as his target. Most of the time, less dramatic calls win out.

But as with any other long-term investment, buying gold requires you to make an assessment of the industry's dynamics independent of short-term influences. That's difficult to do with everything that's going on in the world that affects gold, but if you can do it, then you'll have an edge in sticking with your convictions while others make short-sighted moves that could well prove to be huge mistakes in the long run.

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At the time this article was published Fool contributor Dan Caplinger has owned his share of precious metals for years. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. 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 is as good as gold.

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