After the sudden “flash crash” in gold prices a few weeks ago, the gold price has since recovered, with gold rising to the $1,800 per ounce level this week. And with the potential to keep rising higher, that may have been one of the last great chances for investors to buy gold on the dip before it continues to rise.
It’s probably a bit of an understatement to say that the past couple of weeks have been rough ones for those interested in long-term political or financial stability. The utter collapse of the Afghan government took the entire world by surprise, and the inability of the US government to get its citizens out of trouble quickly has many questioning whether the US government is an empire in decline.
The continued talk of the Federal Reserve tapering its asset purchases has also unnerved many investors. And in response to the potential weakness of the US economy as a result of the Fed’s actions, the gold price saw a resurgence this week.
Ultimately, though, it won’t be until the longer term that we see the potential for major gains for gold. If you’re looking to invest in gold for a few months or a year to try to make some short-term gains, you could end up disappointed.
Gold is a long-term investment that can provide great gains but also hedging against inflation and stock market volatility, portfolio diversification, and portfolio de-risking. So, if you’re looking at gold as a 2, 3, 5, or 10-year or longer investment, then the potential for gold’s future price increases could begin to look better for you.
Gold in the Short Term vs. the Long Term
To sum up the outlook for gold and the gold price, the short term will be driven by feelings while the long term will be driven by reason. In the short term, investor sentiment is going to play a large role. Demand and price will likely be determined by how investors feel about the economy, essentially their gut reaction to what markets look like.
In many cases those investors may be completely wrong about how the economy will fare. That’s particularly true for investors who look at high-flying stock markets and think the economy is doing great and that the future will look rosy for financial markets.
The reality is that the underlying economic fundamentals don’t look good. Economic activity remains sluggish, with companies having difficulty finding labor and raw materials. There is no way to predict anymore with any certainty how business may look six months from now, let alone six years from now. And with millions of Americans still out of work and inflation rising, the combination of factors placing headwinds on economic growth continues to grow.
That’s why long-term price growth for gold will be driven by underlying fundamentals, as the case for long-term growth is strong. If the economy remains weak in the coming years, the gold price could appreciate significantly, as it often does during times of economic weakness. Remember that during the 1970s, gold prices averaged over 30% annualized growth rates for the decade.
If gold were to repeat that type of performance this decade, that could mean a gold price of $5,000 per ounce by the end of 2025. While even the most bullish gold investors couldn’t imagine a price that high so soon, the prospect for a $2,500 or $3,000 an ounce gold price by mid-decade seems perfectly realistic and achievable.
Rising Gold Price Is a No Confidence Vote in the Fed
Another reason the gold price has been rising is that consumers and investors are losing confidence in the Federal Reserve and its ability to use monetary policy to keep the economy from cratering. With over $4 trillion having been added to its balance sheet since last year, the Fed has intervened on a scale that is completely unprecedented.
Now that inflation has been rising, and the Fed has been trying to insist that it’s only transitory and totally not the fault of all the money that has entered the financial system over the past year, investors are getting a bit nervous. Right now, markets are still all in when it comes to supporting and trusting the Fed. But as investors get more nervous, some are going to start to hedge their bets, buying assets like gold to protect themselves in case the Fed either doesn’t know what it’s doing or can’t maneuver to prevent inflation.
What right now is a trickle could end up becoming a flood. That’s the case with all financial panics throughout history. Once confidence is lost, markets quickly come crashing down.
If major investors and financial institutions suddenly lost confidence in the Fed, stock and bond markets would be thrown into turmoil. And already we could be seeing signs that that is occurring.
Continued talk of the Fed’s possible tapering of asset purchases has roiled markets, helping push up the gold price. The Fed seems in a way to be floundering, not really sure what it should do or even what it wants to do. You almost get the sense that Jay Powell and the Fed’s Board of Governors are throwing darts at a board when it comes to deciding on the stance of monetary policy.
If the Fed is seen as reactive rather than proactive, or as being pushed around by either the White House or markets, there’s going to be a reaction. That could very well be in the form of a stock market correction and a rising gold price.
Is Now the Time to Buy Gold?
Ask any seasoned investor when the right time to buy an asset is, and you’ll probably often hear the answer “yesterday.” After all, a bird in the hand is worth two in the bush. And certainly, many investors today are wishing they had bought gold when it was $1,600 or $1,500, or even $1,200 a few years ago.
The gold price doesn’t see nearly the same gyrations as stock markets, so “buying the dip” isn’t a very frequent occurrence. The recent flash crash may have been one of the last dips we see in the gold price for a while, so this could very well be a good time to buy gold.
Remember that the gold price shot above $2,000 last year during the short, sharp recession we experienced. If the US economy is on the verge of a double dip recession, the next phase of the recession could be much more severe and much longer lasting. Much like the 1970s, the 2020s could very well end up being a lost decade when it comes to stock market gains. But for gold, it could be quite beneficial.
If you’re looking to protect your assets from potential economic instability in the future, now is the time to start thinking about gold. Whether you’re looking to dip your toes into precious metals by buying a few gold coins or thinking about rolling over retirement assets like a 401(k) into a gold IRA, Goldco’s precious metals experts can answer any questions you have and help you with the process. Call Goldco today and find out how you can put a rising gold price to work protecting your hard-earned wealth.
is America's Gold IRA Expert, CEO of Goldco Precious Metals, and holds a position on the Los Angeles board of the Better Business Bureau.
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