Although the sawbuck has been a little bit lethargic since the middle of 2013, it’s been broadly increasing in value since early 2011, when gold started to struggle. A couple weeks of higher highs and higher lows for the U.S. Dollar Index (which looks likely, technically speaking) may well be what pulls gold below the key $1180 mark, especially if 10-year Treasury yields break above 3%.
The one thing that could overcome an increasing value of the U.S. dollar and rising treasury yields is rampant inflation. Gold, being a hedge against inflation, could become a hot commodity again if inflation looks like it’s rearing its ugly head.
Problem: With the inflation rate looking like it’s stabilizing at a fairly tepid 1.5%, that doesn’t seem like a plausible threat right now.
In other words, the GLD, GDX and GDXJ might have gotten off to a great start in 2014, but it doesn’t look like there’s not a lot of life left in this uptrend.
And Gold Mining Stocks?
As for gold mining stocks, they’re in a slightly different situation. As long as gold prices remain above the miners’ total cost of digging it up, gold mining stocks at least have something to offer investors — a steady stream of positive earnings. Unfortunately, gold’s current price is just a hair above the typical breakeven level for gold miners.
Although the “all in” mining costs can vary widely from one gold miner to the next, the average right now is somewhere around the $1,200 per ounce mark. That’s not much less than current gold prices around $1,264. And that’s more than the price of $1,180 per ounce that has thus far been a major line in the sand.
Translation: Some miners are already losing money just by remaining operational, and a whole slew more are on the fringe. If the support level at $1,180 breaks, another big swath of the industry will find themselves digging up gold unprofitably.
And that situation is only a 7% dip away.
As nice as it would be for gold prices to truly be on the mend, this year’s uptick isn’t anything we haven’t seen before. Indeed, gold could even tack on a little more upside, and still not shake itself out of its bigger downtrend.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.