Gold’s price peaked in January at $5,589 per ounce. Today, bullion is hovering around $4,073. That is approximately 27% below the peak reached as the year started. Many investors may be disappointed that the precious metal didn’t live up to the lofty predictions regarding its price trajectory as last year ended, but that drawdown carries a major silver lining that savvy investors have noted.
This drawdown isn’t the first of its kind, and when the history of the gold market is put into perspective, now isn’t the time to count one’s losses. Instead, there is a golden opportunity to reposition.
Let’s take a look at what happened during the Great Financial Recession of 2008 when Lehman Brothers collapsed and brought the U.S. economy to the brink of collapse. At that time, the price of gold tanked 32% to put an ounce of gold at about $692 from a high of $1,023.
After that slump, gold skyrocketed by 163% to reach $1,917 per ounce in five short months after the Fed started aggressively lowering interest rates to spur economic activity.
A similar pattern played out after Covid-19 broke out. Gold tumbled by about 28%. This drawdown was then followed by a major rally that saw the price of gold climb to a new record of $2,067 reached in early August 2020. Once again, the rally was fueled by the stimulus package dished out to Americans to help them live through the pandemic and rebuild their livelihoods afterwards.
Right now, inflation is running hot, fluctuations in elevated oil prices are causing gold prices to swing wildly, and one can’t help but draw parallels with the previous two drawdowns that have resulted in major uplegs for the precious metal.
It should be noted that central banks have been ramping up their accumulation of gold once prices dip, and that has provided support that has prevented bullion from sliding even further. When central banks buy gold, they usually hold it for a long time, so that means that the available supplies of the metal are facing increasing demand.
There is a high likelihood that the market is gearing up for a major upswing. It could start in a few months or even more than half a year from now. What is certain is that the setup strongly suggests a major rally is cooking.
There is no guarantee that prices will go up, and there is certainly no guarantee regarding how high they could climb, if at all they do. What savvy investors are doing is to study market trends spanning decades in the past and picking pointers about possible scenarios that could unfold given how similar what we are now seeing is to the recent two major drawdowns in the price of the metal.
Each analyst or investor should draw their own conclusions, and you can be sure that gold miners like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) are also studying the situation and making their own observations.
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