Never mind that gold is posting year-to-date losses and never mind that gold mining stocks are already in a bear market. Is this the start of bad things to come for gold investors?
Gold volatility (^GVZ) spiked over 18.03% in trading on Feb. 20 and the bumpy ride in gold is getting even bumpier. Although gold registered its 12th consecutive yearly gain in 2012, it's actually been in correction mode since September 2011. Is there too much money chasing precious metals?
Fundamentals
On the supply/demand side, the investment demand for gold has been declining. The 17% drop in demand for bars and coins was offset by a 51% gain in ETFs, but still resulted in a 10% demand reduction, according to the World Gold Council. India, the largest consumer of gold, experienced a 12% decline last year in gold demand to 864.2 tonnes.
One positive growth area was central bank purchases. In Q4 2013, global gold investments by bankers topped 145 tonnes, second only to the peak achieved toward the tail end of the credit crisis in Q2 2009.
Taxation on imported gold is another factor that's weighing on the precious metals sector. To reduce its account deficit, India wants to increase taxes on gold coming from outside its boundaries.
The current gold import tax is just 6% but that may go up. "There's a feeling that the government is looking at increasing the duty again, maybe to 8%," said Bachhraj Bamalwa, chairman of the All India Gem and Jewellery Trade Federation.
As the world's largest gold buyer, this may cut India's future demand for bullion in jewelry and investment. India's 2012 drop in gold demand was the second straight year of decline, after consumption was curbed by a jewelers' strike for three weeks to protest a 1% excise duty on non-branded ornaments. While the excise duty was later abandoned, the shutdown cost the industry $3.7 billion in revenue, according to the jewelers' federation.
Although gold gets most of the attention, other precious metals have recently outperformed it on a relative basis. Despite these short-term discrepancies, metals tend to imitate each other. And it's interesting to see how silver (SLV), palladium (PALL), and platinum (PPLT)—all areas of outperformance—have trended lower just like gold.
The trend of lower prices for metals is extremely problematic for one particular industry sector: Mining stocks. Since August 2012, the Market Vectors Gold Miners ETF (GDX) has fallen 19.75%. Conversely, inverse funds like the Direxion Daily Gold Miners Bear 3x Shares (DUST) have soared 44.15% in value.
Decelerating metal prices when the costs of mining are increasing make a bad combination.
Gold in Portfolios
