Although the foreseeable future for gold prices and gold mining stocks is still unclear, one thing is certain: So far, 2014 has been much better for gold stocks than 2013 was.
Since the end of last year, the SPDR Gold Shares (GLD) ETF has gained more than 5%. The Market Vectors Gold Miners ETF (GDX) is up 12% year-to-date. Even the junior gold miners, using the Market Vectors Junior Gold Miners ETF (GDXJ) as a proxy, are up more than 16% since the end of 2013.
That’s a far cry from the 27% loss GLD suffered last year, or the average 54% loss suffered by gold mining stocks, or the 62% bleeding endured by junior miners.
It all begs one question: Is this year going to be one of recovery for gold prices and all of the metal’s associated trading instruments?
Anything’s possible, but…
Gold Prices Bounce Right on Cue
First and foremost, know that the rebound gold futures saw at $1,180 per ounce around the turn of the new year comes as no surprise. That’s where the bulls drew a line in the sand in June 2013 (halting the monster-sized meltdown), and it’s the level the market used as a pushoff point back in mid-2010 to put the big rally back into high gear.
Thus, it makes sense that the market took a stand there a few weeks ago.
Yet, just because the bulls are putting up a fight at a particular level doesn’t mean the bears won’t keep trying to push gold prices beneath it. In fact, the matter might be out of their hands.
While the rampant speculation surrounding exchange-traded funds like GLD and GDXJ has taken on a life of its own, that speculation’s underpinnings are still gold’s usual suspects: inflation, the value of the U.S. dollar and bond yields. While the reprieve from the selloff jives with the recent action on those three fronts, bond yields, the greenback and inflation are in no position to sustain the current uptrend from the world’s favorite commodity.
An Unfriendly Environment for Gold Prices
The inverse correlation between the risk-free yield on 10-year Treasuries and gold futures became crystal clear beginning in 2007. Although gold had been modestly rising in value up until that point, when 10-year yields peaked at 5.1% in mid-2007 and began to fall back to multiyear lows of 1.5% in mid-2012, that’s when gold prices started to soar. All told, gold futures rallied 133% as 10-year Treasury yields fell during that five-year stretch.
As such, it comes as no surprise that the commodity’s demise began right as yields began to reverse.
Yes, the yield trend seems to be hitting a wall at the 3% mark, having been unable to move above that line despite a couple of tries since August. There’s little doubt that consumers — and perhaps the Federal Reserve as well — are starting to expect and even demand higher interest rates. Plus, the long-term uptrend is still intact. A move above the cap at 3% could be quite catalytic — against gold prices.
Ditto for the U.S. dollar.