What goes up must come down
Gold had seen a prolonged bull run from the 2008 meltdown to the beginning of 2013. Fear, the expectation of inflation, and QE (quantitative easing) drove prices higher. Now, gold, silver, and other precious metals are in a secular fall as the economy is slowly rising. There’s a lack of inflation. Also, market sentiment is bearish on gold as a way to store value. Gold peaked to $1,900 per ounce and silver peaked to ~$50 per ounce during August 2011. This gave the highest market capitalization for the SPDR Gold ETF (GLD). It became the biggest ETF in the world.
After precious metals had a few glorious years, prices are falling to the newer corrected marks. Gold futures’ (GC) August expiry fell 1.05% on July 17, 2015. Similar performances were seen by other bullion markets as silver’s (SI) July expiry fell 0.96%, platinum’s (PI) July expiry fell 1.10%, and palladium’s (PA) September expiry fell 2.05%. Since then, futures have had a hard time rising. ETFs that track the performance of these metals like GLD and the iShares Silver Trust ETF (SLV) also fell. Gold saw more down days than up days last week. It closed at $1,090 per ounce on Friday, July 24, 2015.
The above chart shows the performance of gold and silver over the past 15 years. It confirms the downward trend since 2013.
Gold miners are affected
Miners suffered almost double the loss due to the downfall of their core assets. The 30-day trailing return for the SPDR S&P Metals & Mining ETF (XME) and the VanEck Vectors Gold Miners (GDX) fell by 13.81% and 21.34%, respectively. Together, Kinross Gold (KGC), Royal Gold (RGLD), Silver Wheaton (SLW), and Agnico-Eagle Mines (AEM) account for 17.32% of GDX. They fell 22.84%, 17.08%, 23.88%, and 17.62%, respectively, on a 30-day trailing basis.
It’s all about cash flow for Warren Buffett
For years, gold has been labeled as an asset class that could diversify your portfolios. This proved to be right during the downfall of 2008. However, as its stand today, it’s questionable. The equity markets have stabilized. It’s important to remember Warren Buffet’s disdain for gold. It doesn’t have any cash flow returns like the other assets. As a result, it has underperformed. Also, a correlation matrix from January 2013 shows that gold doesn’t have a strong relationship with the other asset classes like bonds and equities. This is positive for gold when markets fall, but not when markets rise.