Gold is a long-term asset

The spot price of gold fell by more than 9% a week ago - the sharpest one-day drop since 1983 - and the market shivered, as though a mug of cold water was chucked over it.

Given that the gold price has gone up more than 300% in the last decade (and 75% since last April), a less than 10% drop, admittedly in a single day, is no reason for alarm. As of mid-week the Dollar price of gold is down by about 6.5%, while silver has slipped by more than 22%.

The annualized volatility of gold is around 17% - fluctuation in the price is normal. By 4 February the price was once more above $5,000/oz.

The price drop coincided with the nomination of Kevin Warsh as the successor to Jerome Powell as chairman of America's central bank, the Federal Reserve. Warsh was widely talked of as likely to resist the White House's pressure to cut interest rates. In particular attention was paid to a speech he made in April, in which he seemed to rebuke the Fed for its drift into more of a "general-purpose agency of government than a narrow central bank." At its heart the Fed has two missions - to keep prices in check and to maximise employment. Warsh has said he regrets the Fed massively expanding its balance sheet; thanks to various Quantitative Easing (QE) programs its balance sheet has expanded from some $800 billion in December 2005 to almost $9 trillion in late 2022.

This conservative-sounding policy pleased risk-averse investors. Warsh, they felt, was someone who would return the country's central bank to a more 'normal' role in financial markets, and thus cut the risks inherent in an expanded balance sheet.

Marginal

Having someone in charge of the FED who sounds risk-averse is undoubtedly welcome but does it really matter for gold?

Holding gold is a protection against the unknown. It's outside the banking system, with no counter-party risk, and gold provides an important diversifier in a portfolio. Possessing gold with Glint also allows the use of gold as an alternative to fiat currency in your regular purchases. Gold supply cannot be increased by government policy, unlike fiat currencies. Fiat currencies have, since the Great Financial Crash of 2007-08, been regularly printed in enormous quantities in many parts of the world, giving rise to inflation, uncertainty and social confusion.

In the US the headline Consumer Price Index - the inflation rate - in December was an annualized 2.7%, still above the Fed's target of 2%. The US economy is doing well - the third-quarter growth rate was 4.4% and the annual growth rate for 2026 is expected to be above 2%.

This strong US economic growth is now fueling some worries among big investment managers of a US-led "inflationary boom", pushing back previously expected cuts to interest rates. The Fed held its benchmark interest rate in a range of 3.5% to 3.75% at its meeting in January; the consensus is that just one small rate cut will happen this year. The same is likely to be true for the UK. Lower interest rates reduce the cost of holding non-yielding assets, such as gold.

Gold in all circumstances

The nomination of Warsh to become head of the Fed has become the main explanation for the price slip. But that's too easy, too simple.

He is seen as someone who will keep inflation under control, but there's no guarantee of that. There are guarantees, of other things.

The Dollar remains under pressure. Geopolitical relations are no better than they were before the gold price slip. The purchasing power of fiat currencies continues to drop. National governments continue to face demands for ever-bigger welfare supports, while at the same time tax revenues are reaching their limits. The structural backdrop to why gold rose so much last year has not changed.

Financial advisors will tell you that 'timing is everything' in investments and that is at least half-true. But getting into gold when the price is rising fast, in the hope of selling soon and reaping some swift profits is not why anyone should own gold. That short-term hope negates the main reason for holding gold; gold is a truly long-term asset, something that can protect against many different disasters. And with Glint, gold is once again money.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

For US clients: Graphic representations of value are for illustrative purposes only. The Glint debt card is issued by Sutton Bank, member FDIC. The sale, purchase and storage of precious metals are offered by Glint and not Sutton Bank. Your investment in precious metals through Glint is

·        Not insured by the FDIC.

·        Not a deposit or other obligation of, or guaranteed by, Sutton Bank.

·        Subject to investment risks, including the possible risk of loss of the principal amount invested.

All investments involve risk, including possible loss of principal. The value of precious metals is affected by many economic factors, including but not limited to the current market price, demand, perceived scarcity, and quality of the precious metal. Precious metals can increase or decrease in value. Past performance is not a guarantee of future results. As such, investing in precious metals may not be suitable for everyone.