Every day, we receive this question, “Why isn’t gold higher?” After all, in an environment with quantifiably high inflation, isn’t gold supposed to shoot to the moon? And since it hasn’t, does that mean that it’s worthless as an inflation hedge?
No.
The economic factors that play into the spot price of gold are multi-faceted, complex, and not always predictable. While there are indicators of long and short-term trends that we can look to for reference, historical patterns are not a 100% accurate indication of future performance. The factors that drove up gold and silver during the high inflationary period in the 1970’s and 1980’s are not the same factors at play in this high inflationary environment.
But we’ll tell you why we think gold has been in a holding pattern, what it will take for the next leg of the bull market to commence, and why you shouldn’t be worried about the spot price either way, if wealth protection is your main motivation for owning gold.
Dollar Demand
The dollar is strong right now, advancing on the old U.S. Dollar Index within the past couple months from 102-103 to over 107. That strength comes as foreign investors trade their currencies for U.S. dollars so they can buy short-term U.S. Treasuries… now yielding around 4.8%.
That “stable”, “safe” investment is attracting global capital.
Meanwhile, high dollar demand suppresses all assets, including gold. Instead of thinking of gold in U.S. dollar terms, think of gold’s value as relatively fixed while the value of currencies is constantly fluctuating in gold terms. When gold goes up in dollar terms, it should be interpreted as the U.S. dollar depreciating relative to gold. But with the dollar’s current strength, we are seeing the impacts of a broken measuring stick being used to measure gold.
What About Inflation?
Inflation is bullish for gold and safe haven assets, but rising interest rates are bearish. As soon as the Fed pivots and begins to lower interest rates, we will see the dollar fall in value and gold spot prices rise.
Inflation is not the only factor influencing gold prices. Not the only one. There are many economic factors in play right now, which is why gold and silver have not rocketed into the stratosphere.
Economic factors that are good for currencies such as high real interest rates tend to be bad for gold. Whereas factors that are bad for currencies such as political instability, rising debts relative to spending, and printing money tend to be good for gold.
As soon as interest rates begin to drop, we will see a turnaround in the markets and a rise in the gold spot price. For now, sit tight on your core precious metals holdings and take advantage of the lower spot prices.
Look Long-Term
When you look at the track record of gold over time, particularly after it was decoupled from the U.S. dollar, there is a steady rise over time, despite some major peaks and valleys in the last 50 years or so. Long term, the story for gold is still strong.
Long term, the value of gold as a hedge against volatility is why it is used for wealth insurance in a portfolio. If your goal for owning gold is the long-term preservation of wealth in a portfolio, then the current spot price on any given day or month is not as important as its long-term trajectory. Gold does its job when it’s held for years and even decades, and when you zoom out, the future of gold is clearly bright.
What’s Next for Gold?
As we saw over the weekend when Hamas militants stormed Israel, when there is crisis, gold is still the choice for safe haven flows. After the unprecedented attacks on Israel by Hamas, and Israel’s retaliation, gold is up about 2% over last week.
These crisis rallies tend to be short-lived and we expect gold to settle or possibly even drop further in the face of high short-term Treasury yields in the coming months. But this is no cause for concern.
Most key indicators still seem to point to a bull run in metals over the next few years. But the rise is never linear or easy… with all the factors at play, we will see temporary pullbacks as precious metals head upwards. And these pullbacks are potential opportunities to add more ounces of gold to your holdings at a lower spot price.
Until the Federal Reserve has a major pause or pivot, there is still ample opportunity to buy gold well at these prices.
We urge you to consider that option while the price is still lower than it ought to be. Call 1-800-831-0007 or email us if you are ready to make the most of the current market situation.