Why Gold and Silver Are Losing Their Luster

As the bull market continues on, one asset class continues to underperform: precious metals.

The iShares Silver Trust , which tracks the price of silver, is down more than 30% in the last year. The SPDR Gold Trust ETF is down by nearly 19%. A tracker for the S&P 500 is up more than 19%, dividends excluded.

The reason is simple: metals are now more expensive to buy and hold.

GLD Chart

More expensive?
Gold and silver are effectively hedges. Goldbugs would say they're hedges against hyperinflation, the death of the U.S. dollar, or a hedge against a global economic collapse.

Gold and silver might serve that purpose.

But it's not necessarily fear -- or a lack thereof -- that's sending precious metals lower. It's their holding costs.

Gold and silver are, by all definitions, "dead money." They produce nothing. No earnings, nor dividends. And if you own metals through an ETF like the SPDR Gold Trust or iShares Silver Trust, you slowly lose metal to the annual management fee.

Interest rates are to blame
A common case for gold or silver is low interest rates will stoke inflation, lifting prices for metals. Higher rates would be anti-inflationary, and thus have a negative effect on gold and silver prices.

The impact of higher rates goes beyond inflationary concerns, however. Higher rates make gold and silver more expensive to own. Before the big plunge in metals last May, the 10-year U.S. Treasury Note yielded about 1.7%. Today, yields sit at 2.73%.

Every dollar deployed in the iShares Silver Trust or the SPDR Gold Trust is a dollar that isn't creating earnings, dividends, or interest payments. Placing cash in 10-year U.S. government bonds generates coupons worth 2.7% over and over again.

As interest rates move higher, asset managers and ordinary investors have to ponder higher return hurdles for precious metals, it becomes increasingly harder to justify positions in negative-carry commodities.

The Fed seems content with a slow taper which would gradually push interest rates upward. As rates trend up, gold and silver will likely continue to trend down.

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The article Why Gold and Silver Are Losing Their Luster originally appeared on Fool.com.

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