Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

SPDR Gold Trust (ETF) (GLD), Newmont Mining Corp (NEM): The Bull Market in Gold Is Officially Over — Here’s Why

No other metal is quite like gold. Physically, its malleable, it does not tarnish, it conducts electricity. Gold can just as easily be pulled into a wire as it can be hammered into a thin sheet or cast in a mold. And, there is also that certain aesthetic appeal.

But the real difference between gold and most other metals is that gold has another, intangible quality. Its an investment asset. Gold appreciated at a torrid pace from the mid 2000s through Q4 2012, but has since reversed. Has the trend been broken, or is this a temporary correction? What is driving the suddenly new world of investment gold?

Gold Price in US Dollars Chart

Gold Price in U.S. Dollars data by YCharts.

Gold has three general uses, all of which contribute to the underlying value of the investment. There is demand for gold for use in industry, demand as a liquid asset alternative to cash, and demand as a safe harbor to market and inflation risks.

Are people just wearing more jewelry?
The most obvious use is as a commodity with applications in industry, primarily as jewelry, but also in dentistry, technology, and others. According to the World Gold Council, demand for physical gold was down 4% year over year. Jewelry demand was down 3%.

Simultaneously, new gold supply was up 2% while recycled gold supply was down 5%. All said, supply and industrial demand were by and large equal — so we can conclude that industrial use is not the driver behind the volatility in gold prices.

That leaves the investment community
Within the investment world, demand for gold can generally be broken down into two components: a liquid alternative to cash, and a safe harbor hedge on inflation and broader economic risks.

First, gold is a liquid investment. According to a 2011 study by the London Bullion Market Association, over $15.2 trillion of gold was traded in the first quarter of 2011 alone.

For comparisons sake, if we assume an average share price of $13 for Bank of America in April 2013, the 2.9 billion total traded shares equal a monthly exchange of $37.7 billion. Multiply that by three months, and Bank of America’s quarterly share volume equals approximately $113 billion. Based on these estimations, nearly 115 times more money was exchanged in gold than in one of the largest banks in the world.

This by no means a rigorous analysis, but it paints a very clear picture for just how liquid gold really is. With memories of Bear Stearns and Lehmen Brothers still fresh, institutional investors have flocked to gold, in part because it is a safe and liquid alternative to housing cash in a banking system rocked by turmoil.

The environment today has changed. The banking system in general is more stable, capital levels are significantly higher, and banks are no longer deploying leverage in the 25-30 times range. As the financial sector heals and confidence returns, the investment demand for gold as a liquidity play will decline. Lower future demand means lower future gold prices.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.