over 1 year ago • 2 mins
This should have been gold’s time to shine. The yellow metal’s famed for being an inflation hedge, after all, and with inflation at highs not seen in over 40 years, you’d have expected it to take center stage. Instead, it finished October in the red, notching its longest losing streak on record, now at seven months running. Since its peak back in August 2020, gold’s shed around 22% of its value, dropping as low as $1614.79 an ounce. To understand why, we need to go back to basics. See, gold provides a return only via capital appreciation – it doesn’t pay any yield in the form of coupons or dividends. So when the Federal Reserve (the Fed) begins to raise interest rates, investors can earn better returns on bonds and other assets – leading to selling pressure in gold. Another cause of gold’s shoddy performance has been the strength of the dollar, which typically shares an inverse relationship with gold’s price: in other words, when the dollar rises, gold falls, and vice versa. In sum, the Fed’s going to have to ease up on its rate hikes before we see the yellow metal on the up again. The chart above suggests there’s a chance gold could snap out of its slumber, but we’ll know more after Wednesday’s Fed announcement.
While no one knows for certain if this record losing streak will end in November, data going back to 1975 shows that when gold does turn around after at least a five month losing streak, the first month of gains is seriously impressive – at an average of 5.5%. That’s combined with a 100% hit rate, meaning returns were always positive. And returns increased as we lengthened the time horizon, with the 6-month average forward returns hitting just shy of 10% – with a 70% hit rate. Not bad for a piece of rock dug from the ground. The SPDR Gold Shares ETF (ticker: GLD; expense ratio: 0.4%) is one way to invest in gold’s potential price rise. If you like a bit more risk and can stomach the extra volatility, then the VanEck Gold Miners ETF (ticker: GDX; expense ratio: 0.51%) could be just the ticket.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.