Facts on the Price of Gold, a Commodity That Seems Immune to Facts

Gold investors love a horror story, and the presidential election provided a willing audience for one. Losing voters, freaked out by their own predictions of an Obama-led apocalypse, bought record numbers of U.S. American Eagle gold coins in November. But this may be a particularly bad time for investments in righteous indignation. At the risk of sucking the wind out of such impassioned fear, we have a few rather jolly charts to share.

30-Year Treasury Bond Yield Chart

30-Year Treasury Bond Yield data by YCharts

Predictions of high inflation have probably done more to elevate gold prices to today’s levels than anything else, although there’s a lot of scholarly skepticism over the strength of this correlation. Nevertheless, talk to any gold investor for 5 minutes and you’ll still hear what a great “hedge against inflation” it is. Gold prices rose in the past few years in large part because investors thought the Federal Reserve’s monetary easing policies, paired with lots of government debt, would cause inflation to rise.

High inflation hasn’t happened. More to the point now, few investors think it will anytime soon, as illustrated by that bond chart above. Yields on 30-Year Treasury Bonds fall like that when there is high demand for them. And who would buy a 2.8% return if they believed inflation would be a lot higher?

Real Trade Weighted US Dollar Index: Major Currencies Chart

Real Trade Weighted US Dollar Index: Major Currencies data by YCharts

Gold investors bet that Obama’s monetary policies also would weaken the U.S. dollar, creating a scenario that typically raises the demand for gold. But with many countries suffering their own economic crises now, the dollar looks relatively strong. And economists believe that there is little the Fed can do to debase it now. According to Bloomberg, nine of the 10 most accurate currency forecasters expect dollar strengthening again after the beginning of 2013, regardless of further Fed easing.

GDX Chart

GDX data by YCharts

Gold price trends tend to follow, belatedly, trends in mining company stocks. You can see by the chart above that most of the time, the two tracked evenly until about the middle of last year. Mining company stocks, represented here by the Market Vectors Gold Miners ETF (GDX), are down about 20% since then, compared to a rise in gold prices of about 10%. Citigroup’s (C) Jon H. Bergtheil just recommended selling mining stocks that are heavy into gold and silver. He’s not alone. (See also this earlier piece on Warren Buffett’s disdain for gold.)

Generally, the biggest threat to gold investors now is the improving economy. Gold prices were higher with higher unemployment, more unsold houses and less credit in the economy. Goldman Sachs (GS) and BNP Paribas recently cut their gold price forecasts because of growing economic recovery. Goldman, for example, forecasts a price of $1,800 at the end of next year, with a further fall to $1,740 by the end of 2014. Investors tend to move more money to stocks as economic recovery grows.

All that good news makes gold’s current prices, built up largely on fears that didn’t materialize, look particularly vulnerable. Gold prices have been rising for 12 straight years now, more than doubling in the last five years alone.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

Investors looking for reassurance in their gold piles can take comfort in the fact that no one seems to fully understand what moves the metal these days. Forecasters have called gold prices bubble-ish many times over the last decade, and boy, were they wrong. Just don’t look too closely at the end of that chart.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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