Gold is supposed to serve as a beacon of stability in turbulent financial and geopolitical times, but that hasn’t been the case for the past two months.
The precious metal took off like a rocket earlier in the year, especially when war broke out in Ukraine. Gold climbed 14% from Jan. 28 to $2,051 March 8. But since then, it has slid 12% to $1,811.
The two main factors hampering the precious metal are the dollar’s strength and soaring interest rates.
The Bloomberg Spot Dollar Index has gained 7% so far this year. A strong dollar hurts gold because the metal is priced in dollars and because gold is viewed as a safe alternative when the dollar is falling. So there’s no need to own gold when the dollar’s rising.
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Meanwhile, the 10-year Treasury yield has soared 143 basis points to 2.94% so far this year. Higher interest rates pressure gold, because it offers no interest income. So higher rates make gold look less attractive compared to bonds.
Many financial advisers recommend holding 5% or so of your assets in the precious metal, as a hedge against bad things happening in financial markets or in the world at large. But keep in mind that gold doesn’t rise over time like stocks.
Gold hit a then-record $850 in January 1980, which translates to $2,982 in today’s dollars. That means on an inflation-adjusted basis, gold has dropped 39% over the past 42 years. Who knows what the next 42 years will bring?
If you’re looking to benefit as an investor when stocks fall, it seems you might be best off just buying stocks. But it is nice to see one of your assets going up when others go down. Of course that assumes gold does indeed rise when stocks and bonds fall, which isn’t the case now.
The author of this story owns shares of SPDR Gold Shares.