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The Crystal Ball—Inflation, Stocks, and Gold

Mar 17, 2019 | David Becker |

The Crystal Ball—Inflation, Stocks, and Gold

Written by David Becker via FX Empire

A stable dollar, lower production costs and a neutral Fed should keep gold prices buoyed.

Are you considering an investment in gold? Gold has always been viewed as an asset that you can use to diversify your portfolio. When stock prices tumbled during the beginning of the great recession, gold prices rallied. Did you know that when the S&P 500 dropped 50% between December of 2007 and April of 2009, gold prices rallied 10%?

The question is whether we are currently at an inflection point where it is prudent to purchase gold. What is clear is that the US economy has experienced nearly 10-years of growth and Europe and Asia are experiencing declining growth prospects. The dollar is stable, inflation remains low, and yields are declining. Gold producers appear to be bullish and cutting production costs. With all of these factors as a backdrop, is it time to buy gold?

Are gold prices likely to increase or decrease?

Gold is viewed as both a commodity and a currency. It is defined as a precious metal, along with silver, platinum, and palladium. Some view gold as a hard asset that increases in value as inflation rises. Others view gold as a currency, that is quoted versus the US dollar. The reality is that gold is both. As a currency, it is viewed as a safe haven especially when other currencies become less attractive.

Since gold is quoted in US dollars, it generally declines in value when the US dollar becomes more attractive. The reason this occurs is that when the dollar rises in value gold prices become more expensive in other currencies.

For example, if the US dollar increased by 5% versus the yen, it would require 5% more yen to purchase the same amount of gold as it did prior to the rise in the value of the US dollar. To compensate for this rise in the value of the greenback, gold prices will slide.

So, to determine the value of gold, you need to have a handle on the value of the dollar. Since hitting a trough in early 2018, the dollar index has rebounded approximately 10%. As the dollar increased in value, gold prices have moved sideways, first moving lower in early 2018 and then rising back to the level where it started that year.

Read the full article at FX Empire: Will Inflation Buoy Gold Prices While the Federal Reserve Is On Hold? | FX Empire