For years, the cure to a shaky stock market has been investing in gold and other precious metals. But recently, the stability of gold prices in the face of declining stock prices has disappeared, leaving investors with one less safe haven to turn to when stocks misbehave. Will gold bounce back, or are its best days now behind it?
Gold isn't shining
The past week was particularly hard on precious-metals investors. Here's a quick look at the highlights:
Gold prices fell through the $1,600-per-ounce level, finishing down almost 4% on the week at $1,581. The SPDR Gold (NYS: GLD) ETF's performance was in line with the move in gold's spot price.
Silver did even worse, plunging through the $30 price point to close at $28.87, down more than 5%. iShares Silver Trust (NYS: SLV) fell a similar amount, and the gold and silver closed end fund Central Fund of Canada (ASE: CEF) finished the week with a 4.5% loss.
Platinum and palladium both followed gold and silver down, as the economically sensitive metals likely dropped because of concerns about a global economic slowdown that could hit demand in key areas like the automotive industry. ETFS Physical Palladium (NYS: PALL) was down 8% on the week, while ETFS Physical Platinum (NYS: PPLT) had a milder 4% loss.
Gold-market followers pinned the moves on a combination of factors. Weak economic data from China weighed on commodities generally, while the big trading loss from JPMorgan last week apparently threw some overall uncertainty into just how stable traders' markets like commodities really are.
Keeping your perspective
One interesting element in the precious-metals markets is how different investors have had completely different experiences with their investments. Depending on when you bought in, your returns may vary greatly from other gold investors.
For instance, since last summer, metals prices have fallen off a cliff. When gold hit $1,900 an ounce in August, $2,000 seemed like a foregone conclusion, and that promise drew many investors in. Yet those gold owners are sitting on substantial losses at current prices.
Silver has gone through an even more painful downdraft. Since peaking near $50 per ounce in late April, silver has never fully recovered from the ensuing harsh correction. Platinum and palladium have seen similar moves as predictions of a stronger economic recovery seem to go in and out of favor.
But for longer-term investors, even a major correction has only put a small dent in the multiyear uptrends for gold and silver. As recently as August 2010, silver traded for less than $20 an ounce. A 40% gain in two years is impressive -- even if it represents a big drop from past paper gains. Gold has seen the same general price action, having risen from below $1,000 per ounce just since late 2009.
Focusing on fundamentals
Skeptics point to poor performance from mining companies as evidence that the bullish run in precious metals is unsustainable. Yet in many ways, the challenges that miners are dealing with prove that fundamentals in the industry favor high prices. Rising costs make it less profitable to mine gold, which could eventually lead to decreases in supply and further upward price pressure for bullion.
The challenge with pricing any commodity -- or any other investment, for that matter -- is that in the end, it's only worth what someone else is willing to pay for it. That has led some investors to avoid the precious-metals arena entirely. But whether it's for jewelry, industrial use, or investment, precious metals have been in demand for millennia -- and despite the big drop in prices in recent months, there's no reason to think that everyone's going to decide gold and its fellow metals are worthless anytime soon.
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At the time thisarticle was published Fool contributor Dan Caplinger knows that lousy weeks can be buying opportunities. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article, although he does own bullion in all the metals mentioned here. The Motley Fool owns shares of JPMorgan Chase. 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 shinier than gold.