After excellent performance in recent years, the price of gold is undergoing a correction that has raised alarm bells among some investors. These types of corrections are common; the price cannot rise uninterruptedly and the correction is healthy to energize the market. In this post we are going to explain the reasons why the price of gold has fallen in February.
The past month of February has been plagued with ups and downs for gold. The metal started the month trading at $1,862.95 an ounce on February 1 on the London Bullion Market Association (LBMA) and closed it on the 26th of the same month at $1,742.85 . That is, a fall of 6.45% throughout the month.
To have a bit of perspective, it should be remembered that the price of the metal began the month of February 2020 at $1,574.75 an ounce on the 3rd and closed it at $1,609.85 on the 28th .
In other words, we are talking about a correction to a higher level of more than $200 than what it had during the past year at this point.
Gold’s correction in February has been influenced by several events. One of the most decisive has been the rise in yields on treasury bonds , the asset with which gold usually competes for the favor of investors.
At the same time, there was a drop in inflation expectations: the index that measures five-year inflation expectations in the United States fell almost 10% in the last two weeks of February, closing the month at 1.91%.
The combination of both factors (higher bond yields and lower inflation expectations) have caused real yields (nominal minus inflation) to rise 30% over the past month, from -1.01 to -0.7%.
In the short term, this may affect the evolution of the gold price. But it’s important to note that 20-year bond yields, which are key for long-term investors, are still negative, so they won’t affect gold investors with that window of time.
To these factors related to bond yields and inflation must be added the continued rise in capital markets during the month of February, and the return of some investors to riskier assets. During the month of February, the positive news regarding the Covid-19 pandemic in the United States multiplied, with a drop in the number of confirmed cases, as well as in hospitalizations and deaths.
All these factors together have caused a certain loss of investor interest in safe-haven assets such as gold, which explains this correction in the price of the metal.
According to Jordan Eliseo , Head of Market Research at Australia ‘s Perth Mint , “a continued rise in bond yields could be a drag on gold, although precious metals may see increased investment demand for safe haven assets if this environment of rising bond yields causes some deflationary shock or a significant correction in the markets”.
Therefore, it is not necessary to get carried away by catastrophizing and take stock of what gold has been losing, but to observe the long-term panorama, in which the trend of the precious metal will always be upward.