Australian shares roared back to life on Thursday!

Following the lead set by international markets, the S&P/ASX 200 (ASX: XJO) soared 109 points, or 2.3%.

It ended the session just below 5,000 points, after sinking as low as 4,760 just days ago…

The country’s major banks all came to the party, as did the seemingly back-in-favour BHP Billiton Limited (ASX: BHP), creating a much-needed spark in the market.

Of course, that’s great for investors, who had watched their shares endure one of the worst starts to a year in history.

But it may not be such a good thing for the gold bugs out there…

The Lure of Gold

Gold has long been touted as a sanctuary for those seeking refuge from inflation and other economic headwinds.

Clearly, we’ve had our fair share of those recently…

First, there’s the slow-down in China’s economy, which has long acted as the engine room for global economic growth…

Then there are concerns regarding the strength of the U.S. economy, with what many analysts believe are overblown fears of another recession

And there was oil, the resource which has lost around 70% of its value since mid-2014, which some pessimists have even suggested could be the catalyst for the second coming of the Global Financial Crisis, or GFC 2.0.

These factors, among others, have caused plenty of uncertainty among investors who have turned to the ‘safety’ of gold in recent times.

In fact, after it traded as low as US$1,050 an ounce as recently as December – a near six-year low for the resource – it bounced as much as 19% to a high around US$1,250 just last week.

And it’s not just gold itself that has benefited – Australia’s gold producers have also soared in value since the beginning of the year.

Just take a look at some of these figures:

TS 19 Feb

Source: Google Finance

With returns like that coming from one specific corner of the Australian share market, you’re probably wondering by now why your money isn’t invested there instead…

It’s a reasonable question for investors to ask.

After all, we all want to put our money where it’s going to get the best returns, so sitting idly by while the gold producers soar can seem counterintuitive.

But what happens if gold isn’t all it’s cracked up to be?

What if, all of a sudden, share investors turn bullish again?

Thursday’s gain wasn’t one of a kind.

Although the market dipped slightly on Wednesday, the S&P/ASX 200 (ASX: XJO) is still up an impressive 4.8% for the week so far after rising on Monday and Tuesday as well.

And what’s caused this sudden bout of optimism, I hear you ask?

It seems to have mostly stemmed from the strong rebound in oil prices – the very thing that caused much of the panic in the first place.

Brent oil prices have surged since they hit a low around US$27 a barrel recently. They raged about 8% higher on Wednesday night and, although they retreated marginally on Thursday, are still trading at about US$34 a barrel.

A surprise fall in crude inventories sparked the rally, while the CNBC also reported that the world’s biggest producers could be close to an agreement to freeze output.

Of course, there is no guarantee that such an agreement will be reached, nor is there a guarantee it would have a material effect on the oil price in the near-term even if a deal is made.

But for now, investors seem content with what they’re seeing, and it’s having a positive impact on market sentiment.

As such, perhaps it’s not such a surprise that the gold price has pulled back a bit since it hit that recent high of US$1,250.

One ounce of gold was fetching US$1,236 as of this morning. It’s still a whole lot better than it was in December, but it still seems the rally may have lost some of its oomph.

In July 2015, Jason Zweig launched a scathing attack on gold, calling it “a pet rock“.

He also said that “you will put lightning in a bottle before you figure out what gold is really worth,” adding that owning gold was simply “an act of faith“.

Warren Buffett isn’t too fond of the precious metal either. The Oracle of Omaha has been quoted as saying (emphasis added):

Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.”

That’s pretty much what it comes down to: fear.

Remove some of the fear, and you potentially remove some of the demand for the precious metal.

According to International Business Times, analysts from Goldman Sachs agree, stating that (emphasis added):

When global markets seize up, investors retreat to safe-haven assets: cash, bonds and gold. But the rush from stocks in recent weeks may have pushed gold prices well beyond what economic fundamentals suggest is appropriate.”

Better yet, those analysts added that “We believe these new fears, like past fears, are not justified.”

Indeed, share markets around the globe have been volatile since the beginning of the year, and it’s been enough to cause something of a panic.

But mark my words: the volatility will eventually subside. It could happen tomorrow, next month, or even next year for all I know, but it will subside.

And when that happens, where will gold go?

As Jason Zweig highlighted previously, predicting the value of gold is virtually impossible to do.

It relies mostly on what other investors will be willing to pay for it sometime in the future.

Gold could rise, or it could fall…

The gold miners are producing some impressive returns right now, but whether that continues will largely depend on the direction of the gold price.

Maybe it will continue to rise, generating greater gains for those ASX-listed gold producers mentioned above…

Or maybe investors will come to their senses, ditching their ‘pet rocks’ when they realise they overreacted to a fall in the share market

When they realise that shares of many ASX-listed companies have become unjustifiably cheap

And when they realise the potential long-term rewards to be gained.

As the ASX flirts with 5,000, some experts are predicting a market crash...

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