Is the Recent Gold Rush Over?

Includes: DGL, GLD, GLDB, IAU
by: Neil Kokemuller

Since 2000, gold has been one of the most consistent and high performing investments in the financial investment arena. The shiny natural resource has returned profit at an annual rate of return around 16 per cent during the last eight years. However, after setting a new all-time high at $1,020 per ounce early in 2008, gold has become somewhat stale. This has become especially apparent of late as investors have become more interested in moving back into more risky investments, including stocks.

Following its climb over $1,000, gold made a gradual dive back to near $700, in the second half of last year. As the stock market really took a nosedive in late 2008, and the economy turned sourer in early 2009, gold speculation picked up again and talk of a return to $1,000 intensified.

Gold has been on a slow and steady decline in the last few weeks, though, as have stocks rallied. The Dow bounced sharply after nearly falling below 6,500 and now sits comfortably above 8,000. Just in the last two days, the spot rate of gold has dropped from nearly $900 per ounce, to a current rate (April 16) of $874.30 per ounce.
What does the gold rate have to do with stocks? While the correlation between the economy, stocks, and gold is not always as strong, unstable economies tend to push investors into safer investments. Gold has long been considered one of the safest money bets by speculators. It is a unique commodity that derives most of its value from its worth as a holding reserve. When cash and currencies are burdened, investors trust the safety of gold, thus driving up demand and the price.
So, where to for gold? A look at short-term technical charts shows gold may be on a fast course back down to retest its near-term lows around $700 per ounce. If the recession end is near, a break below the $700 mark could produce a much more powerful reversal of the trend of the last several years.
And, there were several signs on Thursday that the recession may be on pace for the recovery Fed Chief Bernanke still maintains could come later this year. Jobless claims came in lower than expected at 610,000. Housing starts slowed, but declines in new homes are flattening, potentially creating a bottom. JPMorgan (NYSE:JPM) and Google (NASDAQ:GOOG) excited analysts with their better than anticipated earnings. This collection of modestly positive signs for the economy increased hope for a turnaround, and stocks climbed because of it. President Obama still cautions Americans to be patient and diligent.
There are no guarantees that just because the economy and stocks might turnaround, that gold would reverse its medium-to-long-term direction. founder James Turk has stated on multiple occasions that gold could be in the thousands of dollars per ounce range within a few years, just based on inflation, and global instability. However, it is hard to imagine that as investors move back into stocks and other growth investments, that gold interest wouldn’t decline. Gold has maintained a consistent up and down pattern against the dollar for about 30 years.