Gold is not leading a year 2021 as positive in terms of its revaluation as it was in 2019 or 2020. It is partly logical, given that last year was exceptional, with a global pandemic unknown in the modern era, which triggered the investment figures in precious metals. Not surprisingly, gold reached its all-time maximum price in August 2020, exceeding $2,000 an ounce. In 2021, the movements have been minor and, specifically in September, the metal has undergone a correction that has led it to fall by 4.12%.
According to data from the London Bullion Market Association (LBMA) , the ‘fixing’ price of gold was at $1,811.80 an ounce on September 1 , and at $ 1,737.15 on the 29th of the same month. That is, a drop of $74.65 an ounce, or 4.12% in one month.
Analysts explain this drop in the precious metal by a combination of factors: on the one hand, the rise in yields on US Treasury bonds (one of the assets that compete with gold to attract investors) and, consequently, the dollar.
Gold vs bonds and dollar
At the time of writing this post, gold futures contracts on the US Comex were trading at $1,725 an ounce , while the Dollar Index (which compares the US currency to the euro, pound sterling, Swiss franc, krona Swedish yen, Japanese yen and Canadian dollar) stood at 94.36 points , and yields on the 10-year US Treasury bond reached 1.541%.
As we have already explained on other occasions, gold maintains an inverse relationship with bonds: when their yields rise, the price of the metal falls, and vice versa. The same thing happens with the dollar: when the US currency rises, gold falls, and vice versa.
For this reason, and taking into account the significant jump experienced by the Dollar Index (which is at its highest level in the last 12 months), analysts believe that gold is holding the rate quite well.
It is also a matter of perspective: the situation looks bad, because inexperienced investors tend to compare the current price level with the maximum registered in August 2020, above $2,000 an ounce.
But things change if we take into account that, at this time in 2019 , gold was trading at $1,485.30 an ounce , while, in 2018 , its price was $1,187.25 an ounce . In other words: gold is $251.85 an ounce higher than its price two years ago and $549.90 three years ago.
For this reason, when analyzing the price of gold, it is not necessary to do it with respect to the maximum, but to contemplate the evolution in the medium or long term, which is when precious metals offer their best returns.
The role of the Fed
Another of the factors that have influenced this drop in gold during the month of September has been the intervention of the Federal Reserve . In a previous post we already analyzed how the Fed’s rescue plan influenced the evolution of the precious metal.
After the last meeting held by the Council of the US central bank between September 22 and 23, President Jerome Powell dropped that the dismantling of the multi-billion dollar bond purchase program launched by the Fed to combat the economic effects of the pandemic could start next November and end in the middle of next year.
Given this situation, according to analysts, investors have tended to resort to assets such as the US dollar in the short term, instead of gold, which has led to a considerable rise in the former.
This is because all the possible sources of short-term uncertainty (the US government’s problems with the debt ceiling, concerns about rising inflation, the possible bankruptcy of the Chinese company Evergrande) have led investors towards the safety offered by the US dollar, which has put downward pressure on gold and silver.
In fact, analysts are warning that another rise in the US dollar could trigger further declines in precious metal prices.
In addition, the fact that the US government, through the Fed, has launched an aid plan worth billions of dollars poses a risk for the price of the greenback in the future, which could be devalued.
An effect that, combined with an increase in inflation, would benefit gold, traditionally considered one of the best elements of protection against it.
Despite the fact that the Federal Reserve continues to view inflation as temporary, the current supply problems and the energy crisis could exacerbate this inflationary situation, which would benefit precious metals.
In short, and as we have pointed out on other occasions, to invest in gold you must not get carried away by emotions and keep a cool head: the metal is not a suitable asset for speculation and it is for protecting oneself in the medium and long term, which s when it offers its best returns. So peace of mind and perspective.
