For the past couple of years, there has been lots of investment buzz about gold. It seems like every time I watch television there are commercials from companies offering to buy gold, whether it is old jewelry, watches, coins, etc. While gold certainly has staged a nice rally, other precious metals have actually performed much better. Silver and copper, for example, both produced much bigger gains than gold during recent months.

The fascination with gold has existed for centuries. During the modern era, demand for gold has often been driven by investors who use it as a hedge against inflation. The run-up in gold prices the past couple of years has at least partially been attributed to speculation that continued government spending and growing debt will eventually result in inflation. As the price of gold has risen, there are those who believe that many investors have switched to silver as a cheaper alternative to gold. That could help account for the significant gains in silver during that time.

Below is a chart showing precious metals ETFs for gold (GLD) and silver (SLV) over the past six months. As the chart clearly shows, the increase in silver during that time is significantly greater than the gain in gold. Since the start of 2011, both have fallen off sharply.

The middle portion of the chart shows a moving average convergence divergence (MACD) for GLD. It turned negative in early January and is now at oversold levels. The bottom portion of the chart is a relative strength index (RSI). It too has dropped to an oversold level. While both of these indicators are oversold, that does not mean that an upturn in precious metals prices is imminent. There is, however, some light at the end of the tunnel for investors who have been waiting for a pullback to allow them an opportunity to buy into precious metals.

Today the Federal Reserve Open Market Committee reaffirmed that inflation remains under control and that it intends to keep its interest rates at historically low levels for an extended period. A strengthening economy along with low inflation rates has no doubt contributed to the recent decline in precious metals prices and could keep downward pressure on prices for the near future as well.

There are still plenty of experts who believe that a significant increase in inflation is inevitable. Nouriel Roubini, an economist at New York University, noted that the biggest threats facing the economy include rising fuel and food costs. In a CNN Money report today, he was quoted as saying, “When oil reached $148 a barrel in the summer of 2008, that was the tipping point for the global economy, led to a global recession. That rise in oil and commodity prices led to a significant negative effect on income and spending in the U.S. and Europe, Japan, China and India.�

He also said that the U.S. economy still must deal with massive national debt and struggling state and local governments.

Any perceived weakness in the U.S. economy could lead investors away from U.S. stocks and back to the security of gold and other precious metals. When and if that occurs, it could provide a good investment opportunity for those who missed out on the last advance in metals. Until then, however, there could be additional declines in gold.

Flint Stephens