Gold climbed 1.9% and raced past $2,000 to $2,038.80 (at 10:53 CST, 4/4/23) as the Dollar hit a two-month low. Ten-year treasury yields fell eight basis points after job openings fell below ten million. The total of job openings was 9.93 million, whereas the expectation was 10.4 million. The market believes that the Federal Reserve interest rate hikes are finally starting to contract the hot labor market and will provoke the Fed to slow down hikes.
Market participants do not think the surprise oil production cut OPEC+ announced yesterday will affect the FOMC’s rate decision. The weaker-than-expected jobs data led 56.9% of the market to predict an interest rate hike pause at the next FOMC in May. The remainder of the market anticipates a 25-basis point hike.
Traditional investment wisdom believes that higher interest rates translate to lower gold prices. The belief is that investors will put their money into higher-yielding bonds instead of gold. However, history has frequently shown the opposite. As rates rise, more investors move toward gold. Higher rates negatively affect previously purchased bonds. Investors don't want to buy bonds if they think more interest rate hikes are coming. When the market believes the rates have peaked or are near a peak, bond buying increases, and some money moves away from gold. The market is expecting rates to peak soon and is still buying gold rapidly. The accelerated price gains in 2023 indicate that investors do not trust the paper markets and are primarily playing defense.
Gold tends to rally in periods of market uncertainty. For example, in 2008, many investors rebalanced their portfolios into gold and other precious metals to protect them from the real estate and stock market collapse. Between 2008-2011, gold more than doubled. The price on October 23, 2008, was $714.65. On November 7, 2011, the price was 1788.36, a gain of 150.24% in three years. At the current price, the increase is 185.23%. The accumulative inflation since 2008 is 39.73%, meaning that it costs $1.40 to buy what $1 could buy in 2008, or the Dollar has 71.43% of 2008 purchasing power.
Since 2008, gold has proven the mantra that it is a hedge against inflation. The real rate of return equals the rate of return minus the inflation rate. 185.23% total return minus 139.73% accumulative inflation = 45.5% real return. 45.5% divided by 15 years = gold effectively protected purchasing power and outpaced inflation by about 3.03% annually since 2008.
Gold has performed exceptionally well in 2023, with significant gains over the last month. Gold has grown 10.09% since March 9 (at the time of writing). On March 10, Silicon Valley Bank collapsed, and gold began its rapid ascent. If gold’s momentum continues, gold could set a new record high very soon. The current record price is $2,071, established in August 2020. Some experts believe gold could climb to $2,600 in 2023, and some are predicting as high as $3,000.
It may be tempting to consider the predictions an investment opportunity, but gold primarily protects purchasing power. Any gains are frosting, but not the cake. The cake is protection.
It may be exciting to see gold race upward but realize that gold is racing upward because people are losing faith in the Dollar's purchasing power. The environment is good for gold bugs but extremely dangerous for most people's paper retirement accounts. It may be time to have a serious conversation with one of our highly-trained retirement specialists to see if a precious metals IRA is right for you.
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