Syria fears awaken gold bugsAugust 27, 2013: 2:59 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Gold often does well in times of turmoil. It's a tangible asset that is viewed as both a classic safe haven investment and as an alternative to paper currencies such as dollars, euros and what have you.
Well, guess what? Fears that the United States could launch missile strikes against oil-rich Syria should meet anyone's definition of turmoil.
The price of gold has shot up nearly 4% in just the past five days. Much of the move has taken place since remarks from Secretary of State John Kerry late Monday regarding allegations of Syria using chemical weapons. That helped push gold firmly above $1,400 an ounce.
Gold prices are now up about 20% from their 52-week low. But gold is still down more than 20% from its 52-week high.
The gold bugs had been sleeping for a big chunk of 2013. (Do bugs hibernate? Or is that just bears?)
It definitely seems like worries about the Middle East have awoken them from their uh, golden slumbers. (Smiles await them when they rise.) Gold prices rose earlier this month, following the deadly protests in Egypt.
Shares of big gold miners Newmont (NEM), Goldcorp (GG) and Barrick Gold (ABX) started Tuesday off as market leaders but all lost ground as the day wore on. Still, the Market Vectors Gold Miners (GDX) ETF is up during the past week.
"This is a classic case of a flight to safety. The tension in Syria, as well as Egypt a few weeks ago, have set the wheels in motion for gold to rise," said Mike Meyer, assistant vice president with EverBank World Markets.
Silver has done even better than gold lately. Silver is now trading 35% above its 52-week low. But silver remains in a bear market as well, with prices more than 30% below their 52-week high. The iShares Silver Trust ETF (SLV) has soared more than 7% in just the past week.
Now, it makes sense that gold and silver would be moving higher on fears of more turmoil in the Middle East. Oil prices have unsurprisingly shot up as well. And oil and gold often move in tandem.
Gold is often referred to as an inflation hedge. And if the price of commodities that consumers actually use every day (like oil) start to climb even higher, then gold would likely keep rising as well.
But some experts think the recent run in gold and silver is not over ... and that they could continue to do well even if the tension in Syria is resolved quickly and (relatively) peacefully.
Mike McGlone, head of U.S. research at ETF Securities, which offers ETFs tied to precious metals, says this year's massive pullback in gold and silver was healthy. It helped shake out some of the speculative froth.
McGlone notes that huge demand for gold and silver from Asia (particularly China and India) is a sign that the worst may be over.
"The correction in gold and silver gave investors a good idea of what the ocean looked like with the tide low," McGlone said, referring to the famous quote from investing legend Warren Buffett about not knowing who's swimming naked until the tide goes out.
McGlone said investors should not go overboard with gold or other metals though. He said having gold account for 5% of an investor's portfolio could help provide protection against market volatility that may arise every now and then ... like this week for example.
Still, what about the Federal Reserve? One of the reasons gold and silver have plunged this year is because there is a growing sense that the Fed will finally start to trim (I'm declaring a personal moratorium on the word that rhymes with caper) its $85 billion-a-month in asset purchases sooner rather than later.
Gold had spiked while the Fed was in QE ∞ mode because all those bond purchases helped reduce the value of the dollar, keep long-term bond rates low and fan the flames for eventual inflation down the road. That may no longer be the case if the Fed is going to slow down its pace of quantitative easing.
But McGlone and Meyer both think the Fed-induced gold sell-off was an overreaction.
Meyer noted that cutting back on bond purchases is not the same thing as tightening monetary policy.
"The Fed is still going to be expanding its balance sheet. And it is not raising short-term interest rates anytime soon. That should, in theory, lead to more inflation pressures," he said.
McGlone took it a step further. He used the well-known metaphor about the Fed and a certain cocktail party drink.
"This is just a reduction in accommodation. The Fed is not taking away the punch bowl. It is just lowering the amount of alcohol and steroids that were spiking it," he said.
"There has been a sentiment shift with metals. The lows for gold are in ... not just this for year, but for a long time," he added.