Gold bugs started 2023 with high hopes after the precious metals sector showed impressive relative strength versus paper assets in 2022.
So far, no good.
Gold and silver futures prices got clobbered again last week. The U.S. dollar is back on the rise against other major currencies, interest rates jumped and rattled investors were in the mood to sell paper assets including stocks and metals futures contracts.
The selling was, in part, driven by data which showed higher, and more persistent, price inflation than economists expected.
Gold and silver futures prices aren't exploding higher in response to this inflation. That is one of the primary frustrations for metals investors over the past couple of years.
What matters, at least when it comes to the paper price of gold and silver, is how well the U.S. dollar is faring in the foreign exchange markets and the direction of interest rates.
Why aren't gold and silver working optimally as hedges against all of the price inflation we have seen? Why isn't the prospect of World War III against nuclear armed Russia driving more safe-haven buying? When will metals investors finally be rewarded for being right about debt, deficits and reckless central bank policy?
Behind these questions is one even more basic. Should I add, or even hold, physical bullion if it isn't serving the purpose I bought it for?
For one thing, the question above isn't quite the right one to be asking. It is oriented toward the past and it ignores the alternatives, which is a dangerous way to make investment decisions.
Over the past two years, gold and silver have not performed as well as expected – true enough. That said, metals have outperformed stocks and bonds since 2022. Real estate has turned lower, and this market is even more sensitive to rising interest rates than precious metals.
A better question for frustrated metals investors to ask is would I still buy gold and silver as a safe haven and an inflation hedge, or is another asset likely to work better?
For most people, the answer to the first part of that question is "yes."
Metals have underperformed versus expectations over the past two and a half years, yes, but they fared better than the alternatives. More to the point, they figure to continue outperforming in the months and years just ahead.
It remains vitally important to hedge against a collapse in the Federal Reserve note "dollar" or worse. Now is a good time for frustrated gold bugs to remember one of the most important maxims in investing: It is better to be years early than one second late.