The price of gold has increased by 18% this year, and most stock markets are taking a hit because of it. But what does this mean for investors seeking precious metals in a portfolio? Is now the right time to buy gold? Let’s examine the facts.
Why Is The Price Of Gold Increasing?
Last year, the price of an ounce of gold fluctuated between US$1,200 and US$1,400. This year, however, the metal has risen above the resistance it has previously found near US$1,600 an ounce. The main reason the gold price is increasing is because economic tensions are spiking. Economists expect interest rates to rise, and many major central banks have increased their gold holdings, further boosting the demand for physical metal as a store of value.
Is Now The Right Time To Buy Gold?
Before making a case for or against buying gold, investors should examine their risk tolerance. Everyone is fearful of missing out on the gold price rise, but many investors believe the current price increase is due to speculation and not to fundamental changes in the markets. If you are looking for a safe haven for your investments during these troubled economic times, then gold is a fantastic choice. But let’s examine the case for purchasing the metal.
On the plus side, the yellow metal is inching closer to important support lines. If buyers show up in large numbers, indicating a genuine demand, prices could rise even higher in the near future. The last time the price of gold stood at these levels was early this year, just after President Trump was sworn in. At this point, many economists consider the precious metal to be overvalued, but that could change quickly.
Although much of the recent metal price rise is a function of central banks increasing their gold holdings, the demand for physical metal is still being fueled by investors, and not just by central banks. Let’s take a look at some of the key points that drive gold’s demand from an investor’s point of view.
- The demand for gold is being fueled by investors seeking safe havens. Many large banks have increased their gold holdings this year, and the demand for the yellow metal, as a safe haven, is being driven by investors seeking to protect their hard-earned money from the rising dollar.
- Although many central banks have increased their gold holdings, physical demand, especially from China, is still being fueled by investors wanting to store their wealth in the safest possible way.
- Demand for gold is also being driven by investors seeking a hedge against inflation. With the Federal Reserve raising interest rates and its balance sheet increasing by 10% this year alone, investors are beginning to see gold as a safe haven investment as the next best thing to housing wealth. That’s a lot of buying pressure.
Now, let’s take a quick look at some of the technical factors influencing the current price rise of gold.
- The yellow metal is currently in an uptrend, although short-term traders may want to take a short position
- The bounce back in 2011 represented a key turning point for the gold price. Since then, the metal has steadily risen, albeit with many pulls back along the way
- Gold’s price pattern in 2020 has closely followed that of the dollar. As the dollar drops, the price of gold tends to rise. But if the dollar makes big moves in the other direction, then so does the price of gold
- Currently, the dollar is in a weakening state, which makes it an attractive investment opportunity for gold buyers. The dollar index, which measures the dollar’s strength against the dollar’s five major rivals, is currently at its lowest level since March 2019
- For technical investors, studying gold’s price history can help them gain a deeper understanding of the yellow metal’s current state of affairs. Looking at several thousand gold purchase orders can help them see the bigger picture. To determine the significance of these numbers, simply compare them to the metal’s price trend over the last several years. For example, if you notice the price of gold is significantly higher than it’s long-term trendline, then you can be sure the metal is in a state of overboughtness, and possibly, overreaction. In that case, it may be a good idea to take a short position, or buy puts, to profit from the current weakness.
So, what’s the bottom line? Is now a good time to buy gold? Not necessarily. As we’ve established, the recent rise in the price of gold is being driven by both fundamental and technical factors. But we believe the combination of both of these forces makes it a very interesting time to be an investor in the yellow metal. If you’re looking for long-term investment solutions, then owning a good chunk of gold can be a very profitable move. What’s more, the possibility of a major correction still looms large, so make sure you’re prepared for this eventuality. In times of uncertainty, nothing is ever certain. Just remember, nothing is 100% secure.