gold barsA rapidly growing list of reports shows a U.S. economic recovery that's far stronger than most had anticipated just months ago. Weekly jobless claims came in less than expected, manufacturing is surging and even the housing sector is showing some signs of life.

High-profile bears have been throwing in the towel on pessimistic forecasts, and safe-haven assets like government bonds have sold off sharply in recent days.

But the growing optimism could prove catastrophic for another investment that has seen a tremendous pile-on over the last few years: gold.

Since it generates no income and is impossible to value, gold bugs have considerable leeway in justifying their perpetually bullish stance on the precious metal. Whether inflationary or deflationary times are ahead, for example, gold prices can only go up, according to their theory.

A Global Flight From Safety

And yet recent data suggest that neither of these contrary scenarios is materializing, and a happy middle might lie ahead instead. November's consumer price index data released this week, for example, showed that inflation remains modest. And rapidly climbing Treasury yields signal that the deflationary fears paraded over the summer are fading fast as investors become less willing to accept meager yields in anticipation of declining prices.

Some commentators have chalked up rising yields to the market's growing dissatisfaction with U.S. government debt rather than investors' increasing risk appetite. But investors have been leaving safe-haven assets all over the world, including German bunds and Japanese government bonds.

Investors would be wise to recognize that the rising but still manageable Treasury yields are instead a signal of a growing normalization for the U.S. economy. And even as the contradictory long-term cases for gold recede, a rallying U.S. dollar could be the catalyst for a near-term correction. Indeed, gold prices took a hit this week amid predictions of a rising dollar, closing on Thursday at $1,370, down $15, or 1.1%.

Not Much Industrial Value

That trend could be just getting started. As interest rates in the U.S. rise more quickly than elsewhere, the dollar could be poised for a bounce. Like other commodities, gold tends to see its price move inverse to the greenback.

But unlike other commodities -- for example, oil -- gold has little industrial use. That means economic growth doesn't result in extra demand to offset a rising dollar.

An entire cottage industry ranging from shady cable personalities with questionable endorsements to companies pushing gold coins of dubious quality has profited handsomely by presenting gold as a solid investment. Investors, though, should realize that it has actually performed horribly compared with income-generating investments like stocks over time and tends to be highly volatile. Gold prices have fluctuated wildly over decades.

That volatility could get even more extreme as new instruments like exchange-traded funds have made piling in even easier. But the vast numbers of first-time buyers who have gotten in knowing only big gains could quickly head for the door when things turn, adding to the sharpness of a sell-off.

The big downside risks and potential volatility should be particular warnings to investors who, unlike speculators in hedge funds, might need their cash to pay expenses at some point.

As the U.S. economic picture continues to brighten, inflationary and deflationary scenarios lose their grip, and the market increasingly anticipates a resurgent dollar. As the country's fortunes finally rise, gold bugs could finally see theirs dim.

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Yeah , The economic recovery is just looking FABULOUS isn't it! , I'm also quite sure that the feds out of control money printing policy will only make the dollar stronger ......what type of chemical induced nirvana has this idiot writer fallen into?

January 01 2011 at 12:45 AM Report abuse +1 rate up rate down Reply

Wow! took a big hit this week. Down less than 1%. SELL!...SELL!..IT'S PANIC TIME! I don't know why I waste my time reading articles by this writer.

December 18 2010 at 8:28 PM Report abuse +2 rate up rate down Reply
1 reply to icemanbill23's comment

because you want to see what new nonsense they're going to come up with next.

December 21 2010 at 3:26 PM Report abuse rate up rate down Reply

This writer fails to recognize that the U.S. dollar and precious metals can both rise when investors look for safe havens from collapsing currencies worldwide.

December 18 2010 at 5:04 PM Report abuse +2 rate up rate down Reply

Only fools would expect the dollar to show anything but temporary improvement.
A strengthening US economy will bring back larger trade deficits, on top of
the ever growing budget deficits and the overall debt, which by now rival Spain's.

December 17 2010 at 9:03 PM Report abuse +3 rate up rate down Reply

I don't know which country this article was written in but I would like to move there since the picture is so rosy. I am forced to shut down my own business and layoff,imagine my daughter. Yea it is really wonderful out there. I think I will go and buy some expensive wine and celebrate.

December 17 2010 at 4:04 PM Report abuse +2 rate up rate down Reply

the dollar will not rise as long as The Fed is printing and diluting it. we need the dollar put back on the gold standard and we need The Fed audited and ended and we need a to take the money and power to social engineer via the tax code away from both parties in washington. please!

December 17 2010 at 11:38 AM Report abuse +2 rate up rate down Reply

In March of 1985 I purchased several 50 Troy Ounce bars of .999 silver at just south of $5.00 per ounce. (about $245.00 each). I sold those a couple weeks ago at $30.00 and change per ounce,(about $1,505.00 each), a more than 600% net gain. Nothing I have ever owned has been a better investment than precious metals. not CD's, mutual funds, bonds, real estate, nothing. Volatility not withstanding, invest in precious metals knowing that there will be tremendous swings in value, but that ultimately it will always return more than any other investment as long as you are able to control the purchase and sale dates. Precious metals are not the play for individuals who can't commit long term, or who might find themselves in a bad position and have to sell short.

December 17 2010 at 11:30 AM Report abuse +1 rate up rate down Reply

I sold some of my gld and slv today.

December 17 2010 at 10:32 AM Report abuse rate up rate down Reply
1 reply to enpassant44's comment

....and now you have U.S dollars. I fail to see an improvement in your investment strategy.

December 18 2010 at 4:56 PM Report abuse +2 rate up rate down Reply

You need to be more informed before you say things like you have in this article.
The statement that gold has little industrial use suggests to me someone did not do much research because there is gold in every cell phone. Gold is the best conductor known and is irreplacable in the electronics industry.
You also are not accounting for the comming inflation and you can bet its comming.
The dollar has not got the legs this article would have you think.
It really has not been the dollar getting stronger its the euro and the yen getting weaker so I will stick with my metals for now.

December 17 2010 at 10:01 AM Report abuse +4 rate up rate down Reply
3 replies to BUFFALO's comment

These arguments against Gold and other precious metals make alot of sense except for one thing. Even if the economy turns around, there is no realistic way that we are going to stop deficit spending and address the 14 Trillion Dollar debt and other underfunded issues like Social Security, Pensions, etc (not to mention the Trillions of dollars of Credit Default Swaps worldwide backed by nothing). That means that despite an improving economy, at some point the government will have to start paying much more interest to get people to buy our debt which ultimately increases how quickly the debt will rise. The only way to stop Gold and other Commodities ongoing rise is to eliminate the deficit and start paying down on the debt. If anyone really thinks that's going to happen, I have some Bernie Maidhoff shares I am dying to sell you!

December 17 2010 at 9:48 AM Report abuse +7 rate up rate down Reply