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Gold Corrections Result from Anticipated Inflation

1904 gold $20 Liberty. Images courtesy of Heritage Auctions.

1904 gold $20 Liberty. Images courtesy of Heritage Auctions.

Last March spot gold prices were hovering around $1,500 an ounce. At the time most of us were just realizing the immensity of the pandemic. We were beginning to imagine how our lives would change and how we would handle those changes.

At the same time, investors were eyeing physical gold as a safe haven for their wealth. In April, spot gold prices were gradually driven up to $1,700 an ounce. By the middle of July, spot gold was consistent at $1,800 an ounce. As July ended spot gold was above $1,950 an ounce. Spot gold peaked in early August at about $2,075 and has been in the slow process of downward correction ever since.

Investors gained some confidence in the stability of the stock market and were attracted to those nice yields. They slowly moved a portion of their holdings out of gold and back into stocks. By October spot gold prices were often closing the day’s trading below $1,900. But by then the stock market had risen excessively high and was experiencing breathtaking rollercoaster shifts.

November and December brought the great news that vaccines would be ready soon and while everyone waited in anticipation of corralling the virus, the Federal Reserve began to examine how our economy might emerge from the lockdowns. Spot gold continued its slow decline as investors took note of the Fed’s anticipation of 2 percent inflation coming out of the pandemic. The price index they concentrated on indicated seriously expanded personal consumption as our economy began to open after the lockdowns.

In February 2021, spot gold began to slip below $1,850 with some consistency and by the middle of the month it was dropping below $1,800. Stocks and spot gold have held in lock step as we near the end of February, both exhibiting the serious corrections brought about by sell-offs due to a general desire among investors for consistent yields in the face of possible inflation.

Now we are seeing spot gold nearing a steady $1,775 with stocks experiencing ever more erratic fluctuations. Given the circumstances, investors are surely looking for vehicles with a steady yield in the face of anticipated inflation. On the horizon we can see the end of cheap money and low borrowing rates. Bonds have once again become an attractive proposition, with the 10-year Treasury bond yielding 1.5 percent. Even some CD type investments are starting to offer attractive rates in some limited cases.

The corrective declines we are now seeing in spot gold prices are largely resulting from a shift in investors focus. Metals offered good returns through the first half of 2020, stocks offered great returns during the second half of 2020.

In 2021 a 1.5 percent return on a bond offers a secure way to keep up with some portion of the anticipated inflation to come. However, once it settles in at a solid floor, gold will once again become an option for investors to retain in their holdings. After all is said and done, gold will always be the traditional hedge against inflation because if it’s intrinsic worth. The security of precious metals is the best benefit of being a coin collector!