The gold price experienced its largest intraday loss in nearly two years this week, prompting many to question the future of gold as an investment. Let’s explore the reasons behind this decline and determine if gold remains a worthwhile addition to your portfolio.
The Recent Pullback
After a remarkable rally, the gold price took a breather this week, resulting in a significant pullback. We’ve been strong advocates of gold’s potential, so does this setback mean it’s time to reconsider? Absolutely not. The recent decline is a typical correction within a long-term uptrend. The fundamentals that have driven gold’s rise are still in place.
Historical Context: Lessons from the 1970s
To understand the current scenario, let’s look back to the 1970s. Similar to today, inflation was high, and geopolitical tensions were rife. Despite experiencing pullbacks, the gold price eventually doubled. This historical perspective reinforces the idea that the recent dip is part of the natural ebb and flow of a long-term bullish trend.
Profit-Taking and Market Sentiment
What’s causing this decline? The primary reason is profit-taking. Futures traders, facing losses and margin calls, are closing their positions. Additionally, those who have made gains are seizing the opportunity to realize their profits. This behavior is not unusual, especially after a strong rally.
Despite this short-term loss of momentum, we remain optimistic about gold’s long-term prospects. The recent downturn should be viewed as a significant price correction within a broader bullish trend.
Factors Influencing the Gold Price
Several factors have influenced traders’ decisions to close their positions and take profits:
- Middle East Tensions: As tensions in the Middle East temporarily ease, focus has shifted to the US economy’s resilience and persistent inflation.
- Federal Reserve Policies: The likelihood of a near-term rate cut by the Federal Reserve has decreased, supporting higher bond yields and a stronger US dollar.
- Rising Bond Yields: Traders are capitalizing on rising bond yields and a stronger dollar, impacting the gold price.
Federal Interest Rates and Gold
According to the CME FedWatch Tool, markets see less than a 20% chance of a rate cut in June, with expectations of a July cut dropping below 50%. These shifting interest rate expectations are supporting higher bond yields and a stronger dollar, pushing gold prices down.
However, it’s unlikely the Federal Reserve will hike rates further due to escalating debt levels. Servicing this debt makes maintaining higher rates unfeasible. The Bank of America estimates that US national debt is rising by $1 trillion every 100 days, underscoring the need for eventual rate cuts.
Central Bank Demand
Central banks are buying gold to diversify their reserves. With US debt levels skyrocketing, they prefer gold over US dollars. Gold is the third most held reserve currency and the only debt-free reserve currency, making it an attractive option for central banks and providing further support for gold prices.
The Growing US Debt Concern
Ray Dalio highlighted that excessive debt leads to two outcomes: default or repayment with devalued money. This devalues bonds and cash, making them less attractive. Conversely, gold, as a non-debt-backed form of money, is supported by risks of debt defaults and inflation. Hence, the growing US debt will likely lead to further depreciation of the US dollar, reinforcing gold’s value as a hedge.
Conclusion: Hold On to Gold
The recent pullback doesn’t alter the fundamental reasons for investing in gold. Those who invest in physical gold for long-term security and diversification should view this correction as an opportunity rather than a setback.
If you’re considering entering the gold market, consider dollar-cost averaging. Instead of buying a large amount at once, spread your purchases over several months. This strategy helps mitigate the impact of price volatility.
Watch more here: https://www.youtube.com/watch?v=yvqj1mplXO0
Article and video courtesy of Gold Core.
