MarksJarvis: Gold prices have precious few ways to break their fall

Decline has occurred amid abating economic fears in Europe, U.S.

In a shocking loss for individuals who thought they could count on gold to keep them safe, investment statements arriving in household mailboxes soon will show people the unthinkable.

In three months investors in gold have lost 23 percent. The loss is even worse for people who have been trusting silver to insulate them from inflation, money-printing by the Federal Reserve and dysfunction in Washington.

A popular way to invest in silver, the iShares Silver Trust (SLV) fund plunged 31 percent during the quarter that ended June 30, while the SPDR Gold Trust (GLD) fund lost 23 percent.

Both funds make it simple to invest in gold and silver, yet people who have purchased silver or gold coins and bars have suffered essentially the same losses. They just might not have a broker to send them the ugly news. People who invested in gold or silver mining stocks haven't escaped either. The Market Vectors Gold Miners fund (GDX) has lost 35 percent for the quarter and 46 percent this year.

It's a sad outcome for individuals who might not have suspected such losses were possible in an investment that's been touted as a safe haven.

Fear drove people into gold and silver starting with the financial crash. They kept pouring money into precious metals amid worry that the Federal Reserve's cure for the recession would ultimately cause hyperinflation and undermine the value of the dollar. TV and radio ads promoted doomsday scenarios as they tried to sell gold and silver as protection for nervous Americans.

In late summer 2011, investors were worried about a financial disaster in Europe, and Standard & Poor's knocked down the U.S. credit standing amid debt ceiling debate paralysis in Washington. In response, the gold fund attracted almost as much money as the fund that invests in an index that mimics the stock market. The SPDR S&P 500 Trust (SPY) was the nation's first exchange-traded fund and the most popular of ETF investments. Yet, amid 2011 worries, the gold exchange-traded fund was running neck and neck with it. In August 2011, there was about $86 billion in the SPY and $73.1 billion in GLD.

Gold at that time hit a peak, more than $1,900 an ounce, but last week investors were stunned as it plunged below $1,200 an ounce.

Investors have yanked so much money from the gold fund, that it recently contained just $37.1 billion in assets, according to Morningstar.

The fund's fall from grace "is pretty remarkable," said Samuel Lee, Morningstar's exchange-traded fund strategist.

Gold prices have been declining for months as Europe's financial crisis has relaxed, the U.S. economy has slowly recovered and analysts began predicting an end to the massive Federal Reserve stimulus that fueled fears of inflation.

For months analysts warned investors that if the Federal Reserve started hinting at a pullback on stimulus, investors would start losing faith in the argument for buying gold and would consequently begin bailing out. Then in late May, Federal Reserve Chairman Ben Bernanke started providing those hints, and selling became explosive — sharper than many analysts had expected.

In early June, Citigroup metals analysts argued that the rally in gold from $1,350 to $1,480 an ounce was drawing to a close. But the analysts said in a report this week that they had "thought it highly unlikely that gold could trade at $1,180 an ounce within two weeks."

"It is easy to forget just how volatile metal prices can be," the analysts said. "The week since then has been a useful reminder of that fact of metals life."

Now, analysts are debating whether it is safe to start buying gold again because the absence of hype recently has brought the price down to more reasonable levels. There has been some buying this week, with gold up to $1,244 an ounce Tuesday. But many analysts see no evidence that the old arguments for gold are going to draw people back any time soon.

Michael Widmer, Bank of America Merrill Lynch metals strategist, said in a report that there is a lack of gold investor demand and "we see no imminent trigger to bring new buyers into the market sustainably." He noted that higher interest rates, lower oil prices and a strong dollar all create an environment that defeats the usual arguments for buying gold.

Rather than the hyperinflation that was feared, the global economy is showing disinflation and slow growth. Widmer notes that, with more shale gas produced in the U.S., energy costs have been kept in check and helped keep inflation expectations low.

Further, while the Federal Reserve has pumped massive amounts of money into the economy, it never flowed through the economy, as nervous gold investors had expected. Rather, concerns about future growth have caused a reluctance to spend.

Now, another drag on precious metals prices is coming from recent strains on emerging markets. Those strains are reducing demand for physical gold. India, for example, has been one of the largest buyers of gold in the world, but economic pressures there have the Indian government trying to limit gold imports.

Yet analysts note that if investors detect a mistake by the Fed that could give rise to inflation or some other mishap, frightened investors could buy gold again. Fear has always been a driver of gold. The trouble for many individuals now is that, absent fear, they might suffer for having depended too heavily on gold without realizing it is notoriously volatile.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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