When markets are low, or when the dollar is suffering, investors tend to turn to precious metals as insurance against future unforeseen shifts. This means that, ironically, the price of gold tends to decline as the overall market improves. Over the past four months, gold bugs saw this irony in effect as they followed a bullish upswing in gold’s value. This upswing was likely due to President Donald Trump pushing a trade war with China. The potential market troubles made investors nervous, and increased gold’s value. But recent news has lead to a decline in this upswing on the price of gold.
After a recent report that the United States does not currently plan to de-list Chinese companies from US stock markets, stocks bounced back when the market reopened on Monday. Similarly, the dollar index reached two-year highs on Monday, peaking at 99.46, making for its best reading since April 2017. Because gold’s value tends to go up as the market performs poorly, this presents a risk the price of gold, as well as other precious metals.
“The price of gold tends to decline as the overall market improves”
Specifically, December gold futures dropped $4.00 an ounce to $1,468.70 at market open on Tuesday. Meanwhile, silver prices slid 3% to hit a six-week low overnight. Even palladium, which has been on a 9% rally throughout the month, dropped 0.8% from a record $1,700.71 to $1,668.33. While silver has started to rebound this morning, going up by $0.137, the market’s growing risk appetite still indicates a probable upcoming near-term decline in precious metals markets overall.
“The gold bulls have lost their overall near-term technical advantage,” reports Jim Wyckoff at Kitco. “A four-month-old uptrend on the daily bar chart had been negated and a four-week-old downtrend has begun.” The analyst advises that those aiming for a bullish market will seek to produce a close in December futures above $1500. Meanwhile, he says that those looking for a more bearish market might try to push them below $1,450.
Bullion Exchanges offers live updates on the price of gold on its charts page
This marks a drastic shift from earlier in September, when the price of gold sat 5.6% higher for a six-year high of 1,551.83 on September 4th. While the precious metal has been gradually slumping since, Monday marked a more drastic shift than usual that has continued into today. A combined Jewish and Chinese holiday saw more subdued trading, which lead to a more than $20 drop since market close last Friday.
However, people collect gold for more than a storing value. Several important manufacturing industries, such as aeronautics and the medical field, rely on it for producing equipment. This is part of what lends the metal its famous stability. Even when it falls in the market, its industrial uses make it a safe hedge. This dual-use has, in turn, provided a glimmer of hope for the metal’s value in the past few hours.
“a glimmer of hope for the metal’s value”
Earlier this morning, the U.S. based Institute for Supply Management, which runs a manufacturing index tracking overall growth or contraction in production markets, released data showing that their index read at 47.8% for September, down from August’s 49.1%. While readings above 50% typically point towards economic growth, readings below 50% can point towards contraction. The rate of change, meanwhile, increases as the data moves further from that middle point. This latest report marks a greater shift towards contraction in U.S. manufacturing than even more recent dips, as Tuesday’s report makes for the worst reading for the manufacturing sector since June 2009.
“Comments from the panel reflect a continuing decrease in business confidence,” explained Timothy Fiore, chair of the ISM manufacturing business survey committee. “Overall, sentiment this month remains cautious regarding near-term growth.”
Because of gold’s inverse nature to negative shifts elsewhere in the market, this means that the price of gold slightly recovered today. Specifically, The metal gained .4% to trade December gold futures at $1,478.50 an ounce as of 10:00.
“News of a slump sounds scary, but actually presents an investment opportunity”
Still, with the overall gold market in a four week slump and the relative recency of this news, it’s still uncertain how much of an effect this small jump will have on the overall price of gold in the next few weeks, and if it will continue at all.
For gold investors, news of a slump sounds scary, but actually presents an investment opportunity. Even with recent news of price drops, the price of gold has still not dropped below $1400 since June. The metal, after all, is famed for its resistance to wild swings. Even when it drops, its long-term value as a hedge remains. Future market dips are sure to happen, after all, and this makes future increases in price similarly certain. So as prices drop in the current market, wise investors buy gold while it’s at its cheapest. This is so that the next time the general market drops, they can get the most value possible out of their investment.
In other words, because of gold’s inverse growth rate in relation to the rest of the market, price drops are relatively nonthreatening to those who already hold gold. They can even present an entry point for those seeking to buy gold for the first time.
Bullion Exchanges offers great products to buy while the price of gold is low
For instance, Midas Touch Consulting gold market analyst Florian Grummes sees a positive future for the gold market. In a report Friday, he acknowledged that while bearish traders are currently in control of the marketplace, and that gold prices do have a chance of falling as low as $1,380 an ounce in the coming months, there’s still room for hope. “Although the weekly chart is without question overbought, fundamentally there are currently enough reasons for a continuation of the rally,” he states. In fact, he sees a strong possibility of gold trading around $1,800 an ounce by early next year.
Grummes takes this confidence from a change in how the U.S. Federal Reserve has treated the market as of late. While the organization declared at its last monetary policy meeting that it is not expecting to change interest rates for the rest of the year, he notes that the Fed has directly pumped $75 billion into the system several times during the last two weeks, and is expected to add even more money in the near future.
“A strong possibility of gold trading around $1,800 an ounce by early next year.”
“Thus, the ‘quantitative tightening’ launched by the Fed since the end of 2017 has come to a definite end,” says Grummes. “For gold, these are ideal conditions.”
He continues, “Faced with renewed interest rate cuts, foreseeable monetary concerns and growing tensions in the financial markets, it would be foolish not to rely on the protection of gold.”
In light of a strong U.S. dollar, other analysts are less optimistic. However, with the changes noted above, it’s difficult to predict how the market in general will adjust. This is especially important given the upcoming election year. The future is full of uncertainty. But as stated above, gold is almost never a risky purchase. With a chance that the price of gold could jump as high as Grummes predicts by early 2020, wise investors might want to take advantage of this momentary dip to build up their precious metals portfolio while they can.