Gold is acting strange…
You see, most investors expect the precious metal’s value to rise when stocks are performing poorly. And they expect it to rise in times of recessionary fears.
Of course, both scenarios are playing out right now…
The S&P 500 Index is down a staggering 18% from its early January peak. And at this point, we’re just waiting for the government to officially declare a recession.
So based on common belief, you might think that gold would be serving as a great “safe haven” right now. You might expect investors looking for shelter from the current storm to pour their money into the metal.
But the thing is… gold isn’t acting to script.
The precious metal trades for about $1,740 per ounce today. It’s down roughly 5% this year. And it’s down around 15% from its early March peak of about $2,040 per ounce.
As it turns out, though, gold’s performance isn’t as surprising as you might think…
In today’s essay, we’ll discuss a distinct hurdle for gold right now. Until it changes, we can’t expect much from the metal. But once it does… gold could explode higher very quickly.
Let me explain…
The problem gold faces is something economists call “opportunity cost.” And in this case, it’s due to soaring interest rates. (We’ll get to more on that point in a moment.)
Opportunity cost is simple to understand. It’s the idea that every time you choose to do one thing, you’re choosing not to do something else.
It’s particularly important to us as investors. After all, we can’t make every investment.
We need to choose the investments that we believe present the best opportunities. But on the flip side, that means we lose out on the investments we decide not to make.
The problem for gold is the bond market…
Interest rates are soaring right now. That makes bonds more appealing than gold. Investors who choose gold forfeit the benefits of higher bond payouts due to the rising rates.
That’s the opportunity cost of gold.
Today, the price action on gold tells us the market believes bonds are the better bet. But that doesn’t mean it will stay that way forever.
Let’s look back at the Great Recession…
The recession officially started in late 2007. Interest rates also started falling around that time. And they dropped to near zero around the end of 2008.
Importantly, that’s roughly when gold started going higher. Take a look…
Now, I’m not saying a perfect inverse correlation exists between interest rates and gold. It doesn’t. But gold is caught in a sticky situation right now…
Rising rates mean that holding gold poses a serious opportunity cost for investors.
Today, the opportunity cost of holding gold is so large that its value likely won’t go up until interest rates start falling again. And that might be closer than you think…
You see, the Federal Reserve is currently raising rates in a frenzied attempt to squash inflation. But once it completes that task, it will have to slam rates back down to undo the economic damage it’s inflicting on the American economy – like it did in 2008 and 2009.
So in the end, the bottom line is simple…
Gold isn’t rising due to opportunity cost right now. But once interest rates start to drop, it could take off higher like it did throughout 2009. Be ready for that shift to happen.
Good investing,
Karina Kovalcik
