What Will it Take for Gold to Shine Again?

Investors want to know why gold prices are falling, and how to tell when they will rebound — we answer both questions.

gold bars being cracked open

Gold has been a source of frustration for investors who bought it as a hedge against pandemic-related economic and political uncertainty. Its price has continually eroded in the last several months, prompting growing concern that perhaps the metal has lost its value as a safety hedge.

I’ll make the case here that gold’s value as a protection against both uncertainty and inflation should remain intact. I’ll also explain what is holding gold prices back and what likely needs to happen before the yellow metal can finally resumes its long-term rise.

Gold investors are asking two big questions:

● Why are gold prices falling?
● How can you tell when gold is rebounding?

Why Are Gold Prices Falling?
I’ll start with why gold prices are falling. It’s the result of the puzzlement over gold’s currency factor. Since gold is priced in dollars, a decline in the dollar normally results in a corresponding advance in gold prices. But instead of rallying in the face of recent dollar weakness, gold fell.

It’s not often that gold and the dollar move in the same direction. But when it happens it’s normally the result of a significant countervailing force. In this case, the force in question is the current trajectory of U.S. Treasury bond yields.

Gold, in fact, competes with Treasury bonds; and since gold doesn’t offer a yield, yield-seeking investors tend to favor bonds over gold whenever bond rates are rising. Indeed, the rising 10-year yield has convinced many investors to allocate more of their money to Treasuries at gold’s expense as they remain focused on chasing higher yields.

How You’ll Know Gold is on the Rebound
All told, a significant T-bond yield decline is probably what it will take to kickstart the next extended rally for gold. Falling yields will cause investors to reevaluate their choice in safe-haven assets, and lower yields will naturally make owning Treasuries less attractive than owning gold. Moreover, assuming the dollar remains weak, it should serve as an added enticement for participants to own the yellow metal as a hedge against future inflation.

Bottom line: Gold’s next extended upside move isn’t likely to commence until the rising trend in the 10-year yield has exhausted itself. Rising yields will likely continue to exert some downward pressure on gold prices, even as a weak dollar keeps metal prices somewhat buoyant and not far below last year’s highs. For short-term trading purposes, a sharp decline under the 50-day line in the TNX (below) will serve as a preliminary signal that gold is primed for a turnaround.

In the meantime, with industrial metals (like copper, steel and aluminum) and rare earth metals still in a bull market, it’s my opinion that investors are justified in maintaining higher portfolio weightings in these base metals (via stocks and ETFs) versus precious metals. Just be sure to use a conservative money management discipline (or stop-loss strategy) whenever you’re trading the metals markets.

What are your thoughts on gold investing in the current market, are you buying, holding, or selling?

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