Much has been made of gold’s recent price decline below the symbolic support level of $1,300 per ounce. However, an excellent article recently posted over at Forbes succinctly details why the recent drop in the price of gold should be of little concern to investors who recognize gold’s unique capacity to not only stabilize but help grow their portfolios.
The overriding reason the price of gold has been declining recently is because the U.S. dollar continues to strengthen. The price relationship between gold and the dollar is a simple, inverse one – a stronger dollar hurts the price of gold, while a weaker dollar helps it. The key to this relationship lies in the dollar’s status as the world’s principal reserve currency. Because gold is traded internationally in U.S. dollars, a dollar that’s stronger against other currencies means it costs more the world over to buy gold.
Gold’s Recent Price Action is In Line with Current Economic Conditions
The Forbes article, titled “5 Reasons The Drop In Gold Prices Shouldn’t Worry Investors,” pays particular attention to the influence the stronger dollar has had on gold recently. Author Simon Constable notes that the U.S. dollar index versus other major currencies has risen by about 5% since late January, and gold has suffered as a result. This stronger dollar has, for the time being, offset the normally-gold-strengthening conditions of rising inflation and trade conflict. This is why, in the face of a growing trade problem, markets have not yet fled to the safety of precious metals.
There’s something else: The equities markets, while volatile, remain in the same bullish phase they entered more than nine years ago. The bull has clearly shown signs of growing fatigue for months now, but he’s still on his feet. As a matter of fact, the tech-heavy Nasdaq Composite hit a record high just a handful of days ago. There are plenty of reasons to expect a significant downturn in economic conditions at some undetermined point in the near future; we just haven’t yet reached that point.
The broad theme of Constable’s article is that it would be a mistake to look at gold’s recent price action and conclude that it doesn’t really move like it should during adverse conditions. Some changes in the current economic winds, such as higher inflation and the significantly higher threat of a trade war, can be good for the price of gold. Others, however, such as a much-stronger dollar and still-energetic stock market, will typically put substantial downward pressure on gold’s price. That is what is happening now.
Many are predicting a weakening dollar and sharply lower stock market in the months to come. If those conditions come to pass, they likely will combine with the current climate of higher inflation and growing trade worries to precipitate a strong upward movement in the price of gold.
Gold’s Potential Long-Term Value to a Portfolio Remains High
Gold’s beneficial price action in climates favorable to the metal cannot be disputed. The high-inflation, high-unemployment decade of the 1970s is one example, but there are plenty of other examples of periods when economic conditions were favorable to gold, including throughout much of the 2000s so far. As a matter of fact, for all of the headlines generated for years now by robust stock market returns, gold actually has been the better-returning asset of the two since January 2000. Gold’s strong performances during select shorter-term and longer-term durations in this millennium have enabled it to best the return of the Dow Jones Industrial Average by 200% over the last 18-plus years.
In his article, Constable reinforces for readers the idea that nothing about gold’s standard behavior has changed. It is still an asset largely uncorrelated with traditional assets, and one that can be very profitable, as he puts it, “during times of market stress.” And there are enough of those times, as we’ve seen this century, to allow gold to be a thriving long-term asset, as well.
To learn more about the price of gold and its role in current economic conditions, as well as all of the ways gold can serve you on the journey toward your retirement goals, call Augusta Precious Metals at 855-242-4121. When you call Augusta, please don’t hesitate to ask for more information about the features of a retirement account made up of physical precious metals. If you own an IRA or 401(k) comprised of traditional assets, such as stocks and bonds, consider taking advantage of the unique portfolio benefits afforded by physical gold and silver with a gold or silver IRA rollover.