Gold continues to face a strange combination of tailwinds and headwinds. Even as U.S. inflation rockets toward double digits, gold appears stuck in the mud. Why is it falling? When will it shine again? @$$4$
This version of the original article by Dave McAlvany (vaulted.com) has been edited ([ ]) and abridged (…) for the sake of clarity and brevity to provide the reader with a faster and easier read.
Two things are responsible for gold’s recent downtrend: rising interest rates, and a rising U.S. dollar. As gold approaches its $1,680 support level, what should we understand about these trends? Is it time to buy or sell?
- Rising Interest Rates
- Over the last few months, the Fed has intentionally cranked up interest rates at a record pace…[but] if rates get too high, the government will be forced to push all their tax revenue into interest payments..[and] rising interest rates also hurt the economy and stock prices. The Fed has an interest in protecting the economy and stock market, which limits how far rate hikes can go.
- Rising Dollar
- A rising U.S. dollar is also responsible for suppressing the gold price. Gold is priced in U.S. dollars across all major exchanges. When the dollar rises against foreign currencies, gold gets more expensive for foreign investors.
- The dollar also competes with gold as a safe haven asset. When exiting risk assets, investors typically choose between bonds, gold, or cash. This year, most people have chosen cash. However, there are two reasons why this dynamic is unsustainable.
- Cash is losing purchasing power at a record pace, which limits the amount of time investors are willing to sit in cash.
- Investors, both individual and institutional, are looking for an opportunity to redeploy their cash but, if the economy plunges into a recession, or if inflation remains high, stocks and bonds look pretty dismal.
- The USD dollar:
- A rising dollar is good for the U.S. economy in that U.S. consumers have more purchasing power against international goods.
- However, the threats of a rising dollar probably outweigh the benefits. A rising dollar hurts the revenue of multinational companies. When they receive foreign currencies overseas, they must convert them to dollars at a reduced rate.
- A strong dollar also hurts emerging market economies. Copper, oil, gold, and many other commodities are priced in U.S. dollars. A rising dollar makes commodities more expensive in emerging markets, worsening inflation and adding pressure to economic output. Emerging market economies also have dollar-denominated debt. When the dollar goes up, their debt becomes more expensive to service. The rising dollar has a destabilizing impact across the entire globe.
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Gold is supposed to hedge against economic disasters and this is the perfect environment for gold to take off…but, gold investors must face the same tough reality they have faced for 50 years. Downtrends are long and boring, while uptrends are short and explosive. Stocks are the complete opposite. Bull markets are slow and steady, while bear markets are short and violent.
When it comes to gold investing, very few people have the patience to withstand the downtrends and capitalize on the uptrends. Gold spends a lot of time stuck in the mud, preparing for explosions in price. Most investors ignore all the entry points during bear markets and scramble to buy as much gold as possible during bull market peaks (think 1980, 2011, and 2020). This takes the most important rule of investing – buy low, sell high – and throws it out the window.
Our advice: don’t be that guy. When the gold price finally decides to take off, most investors will be late to the game. Stack up on gold when everyone else shuns it.
Gold investing requires an uncomfortable amount of patience but, when things start to go your way, they go your way fast. Right now you have the opportunity to board the rocket…now [rather] than at the peak of its flight path, when everyone else will be clamoring for a seat. That’s when you can calmly step off, collect profits, and go merrily on your way.