Gold’s Tumultuous Journey
Dear Rich Lifer,
The U.S. job figures released last week had a tumultuous effect on gold prices. On Friday, the Labor Department reported that nonfarm payrolls rose by a seasonally adjusted 943,000 in July — the best gain in 11 months — beating expectations of 870,000 jobs.
The July unemployment rate also fell to 5.4%, down from 5.9% in June, another record low since the pandemic hit last year.
Nela Richardson, an economist at human-resources software firm Automatic Data Processing Inc., commented, “We saw a welcomed upward shift in July, and that’s a significant handoff because the amount of government support is decreasing.”
While this would appear to be positive news on the surface, it sent a ripple effect through many commodities, including gold, copper and oil.
Today, we will explore the gold market specifically and present expert advice on whether now is the time to buy gold.
Gold Loses Its Sparkle
After the jobs report was released Friday, there were initial gains in the markets, with the Dow Jones Industrial Average increasing 0.4% and the S&P 500 added 0.2% — its 44th record-high close of 2021.
But, things quickly took a turn for the worse, as investors began to speculate what the positive report would mean for the Federal Reserve’s easy-money policies.
Monday’s open saw the Dow Jones Industrial Average down 83 points, or 0.2%, the S&P 500 down 0.2%. The Nasdaq Composite began its 0.4% descent on Friday and opened about the same on Monday.
But the stocks weren’t the only thing that began to slip after the news of the increase in hiring…
Gold experienced a “flash crash,” with prices sinking as low as $1,684 an ounce in Asian trading early on Monday. The price is still down 2% at $1,727.50. This was the worst decline since mid-June and the sharpest drop in two months.
So why did this happen?
Simply put, the markets figured that the latest U.S. employment figures would result in the Federal Reserve tightening its tapering policies sooner than previously expected.
This would include raising interest rates in an effort to contain inflation. Since gold is seen as a hedge against inflation, this makes gold a less attractive commodity to own.
And while we know that the Fed will have to change its easy monetary policies eventually, the markets are having trouble locking down exactly when this will happen. Thus, we experience continual market fluctuations as things continue to play out.
The drop in gold prices was a specifically hard blow, especially after a Reuters poll last week showed gold prices increasing to over $1,800 an ounce this year before declining in 2022.
The poll surveyed 38 analysts and traders, and the results showed that the expected median price of gold for the third quarter of the year would be $1,835 an ounce, and the median price of gold for the fourth quarter of the year would be $1,841.
The same poll also predicted an increase in silver, with prices rising to $26.50 an ounce this year, which is slightly above its current level of $25.50.
However, Julius Baer analyst Carsten Menke noted, “Safe-haven demand should fade further as global growth recovers and inflation turns out to be temporary.’
So with the price of gold dropping and its safe-haven role potentially decreasing in allure, is now a good or bad time to invest in gold?
Is Now the Time to Buy Gold?
Analysts seem torn on whether now is the right time to invest in gold.
Luke Lloyd, an investment strategist at Strategic Wealth Partners in Independence, Ohio, said he believes that the Fed is underestimating the impact of inflation and will become “more hawkish” over the next year, raising interest rates sooner than expected.
For this reason, he does not see gold as a good buying opportunity right now.
Przemyslaw Radomski, CEO of investment advisory firm Sunshine Profits, seems to be on the same page as Lloyd. He recently told Forbes that raising rates and a resulting stronger U.S. dollar would lead to lower gold prices.
However, not all analysts agree with this sentiment.
Fred Hickey, creator of the High Tech Strategist newsletter, called the selloff in gold a “pure manipulation play, meant to try to stampede real physical gold owners.” He continued, tweeting:
This manipulation will create a genuine, washed-out bottom for the correction that began off record highs of a yr ago. A correction that’s not unusual following a record high. In long-run these attacks have been to my benefit – as I believe this one will be too.
Peter Boockvar, Chief Investment Officer of Bleakley Advisory Group, seemed to agree with Hickey. He joining the Twitter storm of support for the price of gold, writing:
The trade with gold & silver is pretty straight forward here. If you believe Fed will get ahead of the curve or at least in line with it w/ regards to inflation then sell. If you think Fed will crab walk their tightening, then this selloff is a gift. I believe in the latter.
George Milling-Stanley, chief gold strategist at State Street Global Advisors, spoke with Ben Lichtenstein, the host of Futures with Ben Lichtenstein on the TD Ameritrade Network.
He believes that “the indices are getting a little bit ahead of themselves… I don’t think gold is going to do very much until we start to see physical demand, consumer demand pick up.”
Milling-Stanley went on to state that he doesn’t expect to see this happen until October. Therefore, there is still an opportunity for investment at these lower levels before we see gold prices rise back up.
Additionally, back in June, he had told Forbes that gold prices don’t always sink in a rising rate environment. He cited the time period between December 2015 and December 2018, when the Fed was tightening but gold still rose in price from $1,050 to $1,270.
So ultimately, it comes down to what you believe. Do you think inflation will continue to rise, forcing the Fed to raise rates? Or do you think the Fed will put off easing their policies?
Only time will truly tell…
To a Richer Life,
The Rich Life Roadmap Team