Gold Burns, From Singed to Scorched

The various options for profiting from gold's rise are now showing their downsides
A gold and silver mine in Batang Toru, Indonesia Photograph by Dadang Tri/Bloomberg

Investing in gold during the metal’s rally was a little like wandering into a jewelry store with a number of different counters.

Straight ahead, you could buy physical gold itself. Off to one side, you might be tempted by gold exchange-traded funds, which seek to mirror the metal’s performance, with more liquidity and none of the hassles of storing the stuff. Yet another offering: shares in companies that mined gold, which offer the potential for leverage returns but also exposure to the stock market. In the back, you might buy silver or platinum, which have historically moved in the same direction as gold, with added exposure to certain industrial factors.

The point is, if you bought the general premise of gold—that inflation was nigh, that the metal’s value over the centuries was the best guard against lurking calamities in the euro zone or the Fed or other scary corners—you had your options.

And now that gold has tarnished, officially entering a bear market since last fall, those various strategies have blown up in various interesting ways. Since Oct. 4, the 2012 high, the price of gold itself has fallen 22 percent, including a 9 percent plunge on April 15, its worst one-day performance in 33 years. ETS have followed in near-perfect sync.

The people who pull gold out of the ground have fared much worse. The FTSE Gold Mines Index, which tracks 27 producers worldwide, has lost nearly half its value since Oct. 4. Barrick Gold, the world’s largest gold miner, has fallen 57 percent. That’s even as the broader stock market has rallied. What’s worse, during the run-up, these stocks failed to outperform gold itself, as they have done in previous bull runs. The thinking has historically been that with fixed extraction costs, miners have more to gain from surging prices—it’s pure profit for them. That’s not what happened in 2012, with increased competition from ETFs and costs that, in fact, rose. Collectively, the companies in the FTSE index have lost $169 billion since gold’s all-time high in 2011.

Silver and platinum diverged wildly from gold. Since  the most recent high on Oct. 4, an investment in platinum has fared better than gold, losing 17 percent. Silver, though, has done worse, losing a full third of its value.

Gold is falling largely because global inflation is declining, reducing the metal’s appeal as a hedge against rising prices. Equity markets around the world have survived a series of near-disasters like the U.S. fiscal cliff and the bank crisis in Cyprus. Investors who skipped the gold store in 2012 in favor of stocks have profited handsomely.

Of course, there are scads of options for gold skeptics, too: ProShares UltraShort Gold, to pick one example with the benefit of hindsight, has returned 58 percent since Oct. 4, with a design that attempts to deliver twice the opposite movement of bullion.