In my previous post I shared a few reasons why the price of gold might go up over the next few months.
In this post I’ll take a contrarian view, and look at some reasons why gold prices might stay flat, or even fall a little further than they have so far.
Is it OK to take contrarian views like this? Sure it is. This how we learn and get smarter… by looking at both sides of an issue. And the smarter we become, the better the investment decisions we take.
Let’s get started.
Gold is priced in US dollars… so prices outside the U.S. are a lot higher.
Unless you’re thinking about exchange rates, it’s easy to imagine the world is seeing the same low gold prices we are.
That’s not the case. Most foreign currencies are suffering when compared to the UD dollar. So while we see gold prices holding steady, or even falling, that’s not the case elsewhere. In Europe and Asia, where they have to buy gold with local currencies, they’re seeing the price of gold go up.
The strong US dollar may be good news for domestic gold buyers. But not so much if you’re buying with any other currency.
For some investors, US Treasuries look like a better option.
There’s competition out there right now! Gold bullion may have a reputation as being a safe harbor in times of global uncertainty. But gold isn’t the only safe harbor.
Right now US Treasuries offer a pretty good alternative. As an added attraction, Treasuries are a lot easier to buy and sell than gold bullion. This is particularly true if you’re taking delivery of physical gold.
Put simply, gold isn’t the only option when looking for a safe place to park some cash.
Higher interest rates deliver yields that gold doesn’t.
When inflation is high, investors become very aware that the real value of their cash is shrinking day by day. So they look for investments that provide a yield, or interest. They want an investment that at least keeps pace with the rate of inflation. Or as close at they can get.
Gold may be a great safe harbor bet, but it doesn’t deliver any yield or interest.
This can be painful… you’re holding your gold, and its underlying dollar value is being eaten away by inflation.
It’s no wonder investor aren’t flocking to gold right now.
I think we’ll need to see a fair bit of upward price action before people feel gold is a smart place to park more of their wealth.
Is there anything that could trigger a rise in prices, in spite of the downward pressures I’ve just been writing about?
There is… and that’s what I was talking about in my previous post.