With Dollar Strong, is Now the Best Time to Buy the “Dip”?

Wednesday, October 4, 2017

Yesterday, gold hit a seven-week low on news that showed the U.S. economy continues to hum along, which in turn makes investors think another rate hike will come from the Federal Reserve. With the U.S. dollar index already strong and pushing down the price of gold, it’s possible that we’ll see lower and lower prices as we go on. But is there evidence that this is just a “dip” in gold—a unique buying opportunity? If so, it could mean the difference between making a move and standing by to watch.

Gold’s Performance Over the Previous Months

That phrase “seven-week low” can be intimidating for gold buyers. But when you “zoom” out a bit to get the proper context, you’ll see exactly what it means:

price of gold chart

Apmex.com

Although we’ve seen a steady decline in the price of gold—largely thanks to the burgeoning strength of the U.S. dollar and plenty of economic confidence—that phrase “seven week low” goes back even further, to when gold was still rising as well. The recent performance of gold puts it at the approximate level of late August, but you can clearly see that gold continues to outperform July’s prices.

Gauging the True Quality of Gold’s Prospects

What should concern investors is whether there are enough economic indicators out there that suggest this low is part of a trend, or part of a rhythmic cycle instead.

CNBC quoted Julius Baer analyst Carsten Menke as saying the indicators—or the economic winds—have shifted against the yellow metal. “The factors that pushed gold towards $1,360 in early September are now reversing,” Menke said. That means that bond yields and the U.S. dollar are rebounding, which in turn drives down demand for gold. With a powerful dollar, there is plenty of juice to buy up stocks. With strong bond yields, even those looking for hedges can simply move some money to bonds rather than precious metals.

Reasons to Invest in Gold When It Hits Lows

The headlines in precious metals over the past month or so have been obvious: the dollar has strengthened, so the price of precious metals has gone down. That’s not news. But there are those who believe that geopolitical headlines can continue to be a reason to buy gold. Howard Gold at MarketWatch expressed that opinion recently, saying that President Trump may be the “biggest friend gold bugs have had since President Richard M. Nixon suddenly ‘shut the gold window’”—referring to when Nixon ended the ability of converting the dollar into U.S. gold, thereby ending the gold backing of the American currency.

It’s worth noting that Howard Gold has not been a particular gold bug over the previous years, criticizing famous gold bugs like Peter Schiff. But Gold’s pessimistic outlook on world events have pushed him toward hedge investments, he writes. For gold bugs and gold investors, a brief lull in the price of gold is not simply a seven-week low; it could represent an ideal time to build that hedge in the portfolio.

Darren Capriotti

Darren Capriotti has been a market analyst for the past decade and is an expert in precious metals. He prides himself on his ability to analyze the market and offer true value to investors with questions about gold, silver, and other precious metals. Highly educated, incredibly passionate, and more accurate than most, Darren offers a true, unbiased look into what investors can expect in the precious metals market. You can reach Darren at dcapriotti@gold-eagle.com.