Buy The Dip In Gold

On March 29, 2024 The Wall Street Journal’s Aaron Back wrote a prescient piece about why gold was rallying despite a lack of inflation (“Gold Is Rallying. It Isn’t About Inflation This Time” [SUBSCRIPTION REQUIRED]; I wrote about Back’s article in “Gold Hedges Against More Than Just Inflation”, March 30, 2024). At the time the gold rally baffled me because monetary policy was tight, inflation was under control and I believed gold was simply an inflation play. I had no position despite being a gold bug.

When I read Back’s article I understood for the first time that gold is more than an inflation play. Gold is also a hedge against all sorts of negative probabilities: geopolitical instability, financial crises, civilizational disorder, etc… Back’s article awoke me from my “dogmatic slumber” just in time to capture the massive bull market over the last couple years. You can see the terrific performance of GLD GDX GDXJ SIL and SILJ since March 29, 2024 in the chart at the top of this blog.

After a blowoff top earlier this year, gold has corrected about 20% to around $4000/ounce. In this morning’s Wall Street Journal, Back is Back with an article titled “Buying Gold’s Dip Makes Sense” [SUBSCRIPTION REQUIRED]. In my opinion, his timing this time around may turn out to be just as good as the last.

Back suggests that there are two reasons for gold’s selloff. First, the market is concerned about the Fed raising interest rates. Since gold has no yield, higher interest rates increase the opportunity cost of holding the metal. But, according to Back, a rate increase is far from certain with the market pricing in just a 50% probability of a hike by September.

The second reason Back gives for gold’s selloff is central bank selling. One of the reasons for the gold rally was central bank buying – especially by countries outside the Western orbit who want to diversify away from dollars and protect themselves from economic sanctions. If these central banks are now selling, that would be a significant headwind for gold.

Turkey’s central bank sold 81 metric tons of gold in the first half of the year worth $10.6 billion at current prices. However, Back suggests that the reasons central banks started increasing their gold reserves in the first place – to diversify away from the dollar and hedge against geopolitical crises – are still very much in play.

Back also suggests that at a time when the stock market is almost euphoric over AI, it makes sense to hold some gold as a hedge against the unforeseen.

I already have a full allocation to the precious metals via the most popular gold and silver miner ETFs – GDX GDXJ SIL SILJ – but if you don’t have the position you want the market is now presenting you with the opportunity you’ve been waiting for. All of the forces that have driven gold this high – geopolitical instability, inflation concerns – are even stronger now than when Back first made his case 28 months ago. It won’t be long before gold revisits $5,000 – and higher. Buy the dip in gold.