Why Is Gold Crushing the Stock Market This Year?

gold Canadian liberty dollar coins
Earlier this month, the stock market celebrated the fifth anniversary of its current bull run, with major stock-market indexes having posted unusually strong gains of 25 to 35 percent in 2013. So far in 2014, though, the S&P 500 (^GSPC) and other benchmarks have struggled to make any progress, while much stronger returns have come from an unexpected corner of the financial markets: gold.

With gains of about 15 percent so far this year, gold has surprised most people. But investors are more interested in whether the gains are sustainable -- and whether gold can continue to outshine stocks in the future.

Where Gold Has Been

Until 2013, gold put together one of the most impressive bull-market runs for any asset class in history, with 12 straight years of gains from 2001 to 2012. Moreover, gold's gains put the stock market's returns to shame.

Certainly, stocks have produced strong returns for investors over the past five years, with the Dow Jones Industrials (^DJI) having risen 150 percent since March 2009's lows. But as impressive as that performance has been, it's weak compared to the more than 500 percent gain for gold over that 12-year stretch.

Last year, though, gold came crashing down to earth, ending its winning streak with a 28 percent plunge. Many investors blamed the Federal Reserve for the plunge, pointing to its deliberations early in 2013 on the best way to ease off its economic stimulus measures. By December, the Fed had turned that talk into action, trimming its monthly bond purchases gradually to keep long-term interest rates down. By signaling its belief that the economy could continue to strengthen without further extraordinary measures, the Fed undercut fears that inflation would skyrocket due to the huge amount of money the central bank had injected into the financial system. The downward pressure on the U.S. dollar from extraordinarily low interest rates also eased off, hurting gold.

Is Gold Back?

So far in 2014, several events have helped support gold prices.

One was simply that after such a huge decline in the price of gold in 2013, bargain-hunting gold investors started coming into the market to buy. Even last year, lower gold prices stimulated greater demand for jewelry and gold bars and coins, with the World Gold Council reporting that consumer demand for gold worldwide hit new record levels of 3,864 metric tons. China alone bought more than 1,000 metric tons of gold for jewelry, bars, and coins, and several other countries posted new records for gold demand as a result of cheaper prices.

In addition, economic trends around the world have been less encouraging, helping drive safe-haven buying of gold. In the U.S., a tough winter has had a measurable impact on the overall economy, with retailers seeing less customer traffic and manufacturers therefore having less demand for the goods they make. Meanwhile, signs of a potential economic slowdown in China have raised concerns around the world.

Finally, geopolitical tensions have put gold in a brighter light, with the current conflict between Ukraine and Russia having huge potential to drive further price gains. Russia is the world's fourth-largest producer of gold, with roughly 5,000 metric tons of known gold reserves and production of more than 200 metric tons in 2012 . If the U.S. and other Western countries impose economic sanctions on Russia, the impact on the gold market could be huge, both in terms of supply and demand, and from the ramifications of such restrictions on financial markets generally.

All That Glitters

As gold investors found out in 2013, gold can be volatile in both directions. Yet even though gold has already outpaced the stock market in the first few months of 2014, gold prices could keep rising if the conditions that have taken hold so far this year stay in place in the months to come.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.​

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Gold is down more than $40.00 an once this week.........

March 20 2014 at 10:36 AM Report abuse rate up rate down Reply

I think Gold will have some massive moves 80+ to 120 + point gain days ... The World is not a warm and fuzzy place that we think it is ..... and huge storm clouds lay ahead , add in a missing 777 and desabilized Ukraine ..... and few more uncertain items on top of that ........and the pot starts to boil !

March 18 2014 at 9:24 PM Report abuse -1 rate up rate down Reply

I dont understand this artiicle; Gold has returned 15% and s&p has returned 100%. Last time I looked 100% was better than 15%

March 18 2014 at 3:25 PM Report abuse rate up rate down Reply

Nice try but it is not. It is down nearly $600 in the last 3 years. Don't try to bolster your sinking investment with this bologna. You must pray for fear and unrest.

March 18 2014 at 1:28 PM Report abuse +2 rate up rate down Reply

Right now gold is $1,357.00 In 1984 it was $850.00 a Troy ounce (thirty years ago).
You would have done better if you had put your money into a savings account paying only 2%
The big advances have been in iron, copper, and brass - true industrial metals.

March 18 2014 at 12:25 PM Report abuse +2 rate up rate down Reply
1 reply to alfredschrader's comment

Your historical data is off.

Gold was at $105 per troy ounce in August of 1976. It peaked at $850 per troy ounce in January of 1980. At no time during 1984 did gold ever rise above $410 per troy ounce.

March 18 2014 at 1:53 PM Report abuse +3 rate up rate down Reply
1 reply to drpmindmender's comment
Tom Wilson

Don't confuse alfred with facts. His head may explode.

March 18 2014 at 2:56 PM Report abuse +3 rate up rate down
Tom Wilson

Research shows gold has underperformed stocks, bonds, bills and even real estate over the long run. It has total real returns of just 0.6 percent per year since 1802, compared with 6.6 percent for stocks, 3.6 percent for bonds and 2.8 percent for bills. One of the only things gold has beaten is the dollar, said Siegel.In general, the dollar-gold link has been viewed as the key feature of the Bretton Woods system. In 1971, President Nixon “closed the gold window” by officially canceling the right for all other central banks to convert any dollar holdings into gold. Many have considered this the year of Bretton Woods’ demise. However, the dollar-gold link had always been an illusion elevating the dollar to the role of a global reserve currency. The true significance of Nixon’s decree in 1971 was simply to destroy that mirage.
The amount of gold in a $20 double eagle is about 1 troy oz (it weighs a little more than that, but is 10% copper). In 1948 a troy oz of gold was $35, so the coin has appreciated about 45-fold. In 1948, the S&P 500 index was at 16.8, it has appreciated 67 fold, a 46% greater return.If one had sold the gold double eagle in 1948 and used the proceeds to buy a diversified stock portfolio, one could now sell those shares and buy 1.5 gold double eagles. If one had held onto it they only have one double eagle. So whatever your preferred medium of exchange, the stock market has done well over the last 63 years.

March 18 2014 at 11:03 AM Report abuse +2 rate up rate down Reply
1 reply to Tom Wilson's comment

Iron has done much better than gold. This is where owning barren desert comes into play. A desert is where you keep iron so it doesn't rust.
Like I said in the past, I can make money out of anything, even desert.

March 18 2014 at 12:25 PM Report abuse -1 rate up rate down Reply
2 replies to alfredschrader's comment

What is the point of buying and owning desert land to stockpile iron, scap or otherwise?

March 18 2014 at 1:53 PM Report abuse +1 rate up rate down

Also, iron is not nearly as heavy as gold.....and you can light either end.

March 18 2014 at 2:01 PM Report abuse +2 rate up rate down