We have long grown accustomed to seeing gold at levels above $1,700 for the past year. As soon as COVID hit, the gold spot price fell to just under $1,500 per oz. However, it hit an all-time high in August, and then steadily declined until February and March of this year. But why is it that the gold spot price is dipping now when Bitcoin remains one of the top investments?
Bond Market and The Fed
This week, many are paying attention to bond yields and inflation alarms. Despite that, Federal Reserve Chair Jerome Powell continues to argue that inflation is not a concern at this time. And yet, inflation directly impacts rising bond yields heavily. This is because inflation also erodes the true worth of a bond’s face value. This is particularly sensitive when it comes to longer maturity debts.
Instead of quelling investors’ concerns, Powell said in his address “I would be concerned with the disorder in the financial market or unwanted tightening. It’s not about one particular price.” Basically what investors took away from this is that the Fed is willing to let bond yields increase without any intervention from the central bank.
Jim Wyckoff of Kitco indicated: “What the bond market is telling the marketplace is that bond traders really do not believe Powell’s assessment that inflation will not continue to heat up in the coming months, and that higher inflation in the coming months could prompt the Fed to raise interest rates much sooner than many had reckoned up until just recently.”
People consider bond traders as some of the smartest around. However, Powell’s deflection makes it seem as though the Fed is simply not paying attention to inflation right now. Despite this idea, investors appear to be fleeing from gold, ready to stop fretting about the economy and return to normalcy. In fact, the gold spot price fell below $1,700 on Thursday, and remained at this low level all of Friday.
Economic Updates This Week
Upbeat news about unemployment and reopening economies at full capacity in Mississippi and Texas have people optimistic about the economy. Additionally, the US dollar index is higher and reached a 3.5 month high overnight. The rise in US Treasury yields contributed to this rise. Consequently, demand for safe havens declines this week: the gold spot price fell, erasing nine months of profits entirely.
Where Does the Gold Spot Price Go From Here?
Leigh Goehring, a managing partner of Goehring & Rozencwajg, indicated that although this is frustrating for gold bulls, this correction was bound to happen. “In a gold bull market, you have periods where silver lags behind gold. Silver lagged from 2016 to 2020. Then from April to July, silver had a massive move up. To us, that signaled that gold had entered a corrective phase. We’ve been in that phase ever since.”
Goehring also followed up to say that anticipating a reversal is not easy, but he expects it to occur in the second half of this year. He specifically indicated that oil impacts the gold spot price, which has been increasing dramatically. Most notably, he indicated that investors should watch out for when one ounce of gold can buy 15 barrels of oil. That is when the gold market will truly bottom. After that, investors may see that gold is cheap in comparison, and thus realize it is a great investment. The current gold-oil ratio is about 1:26, meaning one ounce of gold can buy 26 barrels. About five months ago, the ratio was 1:50.
What About Inflation?
So it seems that investors forgot about inflation after Powell stressed that it was not a major concern at this time. However, Goehring believes that inflation will be the key to kickstart the next major bull run. Right now, he looks to a “massive misallocation of capital flows,” specifically in regards to Bitcoin and GameStop. These manias won’t last in his opinion, and so, the trends will change. He also believes that a “black swan event” will aggravate inflation in the future, which he predicts could be a global agricultural crisis. More specifically, he believes that major weather events could impact the grains market, which protein production relies on. An inflationary problem that starts here could extend into other markets like copper and oil.
That being said, there are mixed opinions on gold at this time.
What Are Analysts Saying?
Darrin Newsome, the president of Darin Newsom Analysis, noted that Powell’s comments mean that bond yields are going to rise without intervention. This will keep the pressure locked on gold.
However, Ole Hansen, head of commodity strategy at Saxo Bank, mentioned that he is bullish on gold in the short term. This is because he believes the gold spot price will continue to stay at its 11-month low level. But also, he does not believe that gold’s struggle is over.
On the other hand, Adrian Day, president of Adrian Day Asset Management, is also bullish on gold since he thinks that the selloff is over. Therefore, he expects a recovery to start.
For the moment, inflation is being ignored by the Fed and the masses. Colin Cieszynski, chief market strategist at SIA Wealth Management, believes that gold will continue to struggle until inflation cannot be ignored any longer. Other than gold, commodities are rallying across the board, so it may only be a matter of time before inflation rears its head in consumer markets. Hedging against inflation may, unfortunately, come too late for many people by that point.
With the recent fall in the prices of gold and silver, now could be a good time to buy in while precious metals are less expensive. Take a look at some of our new inventory for each metal, and do not forget to check out our Deals page to save even more! No matter where you are in the US, you can take advantage of our online store. We are always happy to provide you with numismatic coins and precious metal bullion in gold, silver, platinum, palladium, and rhodium.