For eons, gold has been the go-to hedge against inflation and economic downturns. But like every investment vehicle, its efficacy ebbs and flows with changing market conditions. Here’s why, based on recent data and trends, gold may not be the glittering investment you’re hoping for right now.
1/ Gold’s Diminishing Luster: Inflation May Not Be the Culprit
Gold, historically, has had an intrinsic relationship with inflation. Investors often flock to it when they expect inflationary pressures to rise. However, the recent Chart Advisor paints a different picture. It contradicts the belief that the U.S. is in the throes of high inflation.
Over the past year, the SPDR Gold Trust ETF (GLD) has been an apt reflection of these market sentiments. When inflation was the talk of the town, gold gleamed ever brighter. Yet, since June, a change in dynamic is evident with GLD reflecting a series of diminishing highs and a clear downward trend.
With the Consumer Price Index (CPI) and the Producer Price Index (PPI) reports unlikely to showcase any runaway inflation, the gold market might just be faced with an extended bearish trend, taking it closer to its historical lows.
2/ Dollar’s Strength – Gold’s Kryptonite
A significant factor in gold’s declining appeal is the renewed vigor of the U.S. dollar index (DXY). A deep dive into the relationship between gold and the dollar reveals an evident negative correlation, which also extends to other precious metals, such as silver. This is clear from a comparative analysis between iShares’ Silver Trust (SLV), GLD, and DXY.
Why is this relationship so crucial? Gold and silver, like many global commodities, are priced in dollars. When the dollar strengthens, it can buy more, essentially leading to falling commodity prices. Conversely, a weak dollar elevates commodity prices. Given the dollar’s current ascent and the stable relationship over the past year, it’s a telling sign that markets, contrary to some views, are in a relatively healthy state.
3/ Hope for Metal Miners?
Should there be a reversal in the dollar’s trajectory or if gold regains its sheen, the first to benefit would be the companies mining gold and silver. A comparative chart including GLD, VanEck’s Gold Miners ETF (GDX), and significant holdings such as Newmont Mining (NEM), Barrick Gold (GOLD), El Dorado Gold (EGO), and Freeport McMoran (FCX) indicates minimal gains over the past year, with FCX being a slight exception.
However, these trends could see a reversal, especially if inflation indications prompt the Federal Open Market Committee (FOMC) to hint at further rate hikes post their September 19th meetings.
4/ Capitalizing on the Downward Spiral
Though gold’s prospects currently seem bleak, it offers an avenue for the astute trader to leverage the downward trend. By employing a short-selling strategy with GLD shares or gold futures contracts, traders can gain from falling prices. A more adventurous approach would involve the MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD). This tracks a triple leveraged inverse relation to gold prices. A mere 10% dip in gold prices could potentially translate to a 30% surge in GDXD.
In Conclusion
The old adage “All that glitters is not gold” seems apt for the current scenario. While gold’s traditional allure is undeniable, it’s essential to adapt one’s investment strategies based on prevailing market conditions. Current charts and market signals advocate caution, urging investors to think twice before diving into gold investments, at least for now.
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