Gold’s Down But It’s Not Out: Why Now Is Still A Good Time To Buy The Precious Metal

Gold’s Down But It’s Not Out: Why Now Is Still A Good Time To Buy The Precious Metal
Stéphane Renevier, CFA

over 2 years ago4 mins

  • The short-term outlook for gold isn’t particularly promising: real yields have room to rise, the US dollar could grind higher, and technicals are mixed at best.

  • But this doesn’t mean you shouldn’t hold gold: the metal offers diversification, protection from high inflation, and defense against stock market crashes.

  • If you want to hold gold in your long-term portfolio, then right now is as good a time as ever to buy it.

The short-term outlook for gold isn’t particularly promising: real yields have room to rise, the US dollar could grind higher, and technicals are mixed at best.

But this doesn’t mean you shouldn’t hold gold: the metal offers diversification, protection from high inflation, and defense against stock market crashes.

If you want to hold gold in your long-term portfolio, then right now is as good a time as ever to buy it.

Mentioned in story

Gold’s having a tough run of events: its price crashed 4% on Monday to a four-month low. But don’t count the metal out just yet – there are still plenty of reasons to have gold in your portfolio.

Outside of its rally in Q2, gold's not having a great time
Outside of its rally in Q2, gold's not having a great time

Is gold about to rally again?

Back in March, we recommended buying the dip in gold’s price. And prices did rally, but let’s face it: the short-term outlook for gold is quite different now.

For starters, real yields – which are just nominal yields minus inflation – are much lower this time around. That means they have a lot more room to rise should the economic recovery accelerate. And rising real yields are bad for gold. See, gold doesn’t pay any yield at all, so real yields creeping up will increase its opportunity cost and reduce its attractiveness.

Secondly, the US dollar – while at a similar level to back in March – is arguably more likely to grind higher. The debate around when the Fed should start to raise interest rates is intensifying, while other central banks are likely to keep their economy-stimulating monetary policy for much longer. As gold is priced in US dollars, a higher dollar makes it more expensive for other countries to buy gold. That reduces demand and pushes the gold price down.

Lastly, technicals look weaker too: the amount of money being added to gold ETFs has decreased significantly recently, and the momentum of gold prices has turned decidedly negative. The fact that gold’s price fell as much as 4% in a few hours is worrying: it shows that there’s limited support for high gold prices at the moment. And the downward movement in gold’s price could quickly accelerate should more negative news hit the market.

That being said, the price of gold won’t necessarily fall further. The economy’s not out of the woods yet from the effects of the pandemic: inflation could still go up, and market sentiment could quickly turn sour given stocks’ high valuations. But compared to the situation in March, the chances of a sharp rally in gold’s price don’t look as promising.

Should you forget all about gold then?

Nope. A mixed short-term outlook for gold prices doesn’t mean you should ignore the shiny metal altogether. But, as is often the case with investing, what you choose to do will depend on your objectives.

The first question you should ask yourself is whether you’re interested in buying gold as a short-term tactical trade opportunity or to make your long-term portfolio more balanced.

If it’s the former, the current risks versus rewards are arguably not positive enough to make gold a good opportunity. But there are three enticing reasons for the latter.

First, you could add gold to your portfolio for its diversification benefits. It boasts a low correlation to other asset classes like bonds, equities, and even crypto, and could diversify your portfolio’s sources of risks and returns.

Second, you could buy gold for its protection against high inflation. Since gold is a real asset, and its supply can’t easily be expanded, it should hold its value when fiat currencies are devalued by inflation.

Third, you could buy gold to protect yourself from stock market crashes. Gold has historically performed relatively well in previous stock market downturns: it benefits from investors buying it up for its “safe-haven” status and from central banks cutting rates to support markets.

So what’s the opportunity here?

If you’re buying gold to improve your portfolio, the short-term outlook in prices shouldn’t be a decisive factor in your decision. It’s notoriously difficult to time gold prices, and since holding the metal makes your portfolio less risky, not holding it could prove to be the riskier option. In short, there’s no time like the present to buy gold if you don’t have any.

If you’ve decided that you do want to invest in gold, your next consideration will be how to go about it: whether it’s better to buy physical gold or gold mining companies. And while a full comparison is beyond the scope of this nsight, I do have one piece of advice. If you want to hold gold to balance out your portfolio, buying physical gold tends to work better than gold miners – they tend to behave more like stocks, so you won’t get the same diversification benefits and protection against market crashes.

Fortunately, accessing physical gold has never been easier or cheaper. One of Blackrock’s latest launches, the iShares Gold Trust Micro (IAUM US), is the lowest-cost way to bet on gold prices: you’ll pay just 0.15% in fees But if you prefer products with a longer history, you could buy the iShares Gold Trust (IAU) or SPDR Gold Shares (GLD) instead – despite having slightly higher fees, these are both affordable options.

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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.

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