In turbulent financial and geopolitical times, gold is expected to serve as a beacon of stability, but it hasn''t been the case for the past two months.
Gold climbed 14% from January 28 to $2,051 March 8. It has now dropped 12% to $1,811.
The two main factors that impede the precious metal are the dollar''s strength and rising interest rates.
The Bloomberg Spot Dollar Index has increased by 7% this year. Gold is hurt by the metal being priced in dollars and because gold is viewed as a safe alternative when the dollar falls. So there is no need to own gold when the currencies are rising.
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So far this year, the 10-year Treasury yield has risen 143 basis points to 2.94%. Gold is pressured by higher interest rates, which are because of its lack of interest income. Also, higher interest rates make gold look less attractive than bonds.
Many financial advisers suggest holding 5% or so of your assets in the precious metal as a defense against bad things happening in the financial markets or around the globe. However, keep in mind that gold does not rise over time as stocks.
Gold hit a then-record $850 in January 1980, which translates to $2,982 in today''s dollars. That means gold has dropped by 39 percent in the last 42 years, according to the media. Who will know about the outcome of the next 42 years?
If you want to gain valuable position as an investor when stocks fall, then you might be best off buying stocks. It''s nice to see one of your assets rising when others go down. Of course, gold does indeed rise when stocks and bonds fall, which isn''t the case right now.
The author of this book owns shares of SPDR Gold shares.