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June hasn’t been a great month for gold – it lost 6.5% over the month. But then again, it hasn’t been a great month for many investors- the KLCI fell by 3.2% and Bitcoin fell by 5.5%¹. I would like to put the sharp gold fall into perspective and to offer an alternative view on gold.

Investor or trader?

Am I worried about gold? I am not. But before I explain why I am not worried, I should clarify that I am not a trader, I am an investor. As an investor, I usually buy gold and hold it over a long period of time – for me, that’s 2 years and beyond. Traders, on the other hand, usually enter and exit positions over a shorter timeframe e.g. months and weeks rather than years, taking smaller, more frequent profits. I don’t trade because I am generally risk averse. Trading can be a thrilling way to earn fast money. However, like gambling, it can also quickly lead to big losses. Investing, on the other hand, for me usually means smaller short-term wins, but also fewer severe losses. Whether you decide to behave like a trader or an investor is ultimately a question of how comfortable you are with the risks. So, for me, short term movements aren’t a real cause for concern if the underlying reasons why I hold a position remains unchanged.

Market pullbacks

With my position as an investor cleared up, why am I not worried about the gold performance in June? Take the sharp fall in gold from US$1,907.75 per oz on 1 June to US$1,870.97 per oz on 2 June – a decline of US$36.78 or 2% in a 24-hour period – as one example of gold’s June performance. In March 2020, gold fell by nearly US$200 or 12% in a space of 10 days before it began its run-up to break the US$2,000 barrier. I believe that pull backs are an inevitable ingredient in a bull run – to borrow a quote on market pullbacks in the S&P 500 since World War II “The majority of declines fall within the 5-10 percent range with an average recovery time of approximately one month, while declines between 10-20 percent have an average recovery period of approximately four months. Pullbacks within these ranges are not uncommon, occurring frequently during the normal market cycle. While they can be emotionally unnerving, they will not generally undermine a well-diversified portfolio and are not necessarily signals for panic.”

Inflation

This then begs the question – why do I believe that the gold market still has legs. There has been a lot of talk in the US markets that the US Fed will likely continue to print more money with no significant inflationary impact and that the recent spike of inflation was temporary because it has arisen due to pent-up demand and supply chain lags. I do think that the US Fed will continue to print money over the short to medium term but I am not so sure that there will be no inflationary impact. Nor do I think that the recent 5% inflation is temporary. Since the pandemic started, any number of inflation data series show momentum on par with 2008. Someone has to pay for that.

Chart of global inflation & retail spending

If inflation stays high, then the US Federal Reserve may have no choice but to stop printing money. If they take that step to switch off the liquidity tap, I, like many others, believe that this will also mark the beginning of the unravelling of rational exuberance.

I am worried about global inflation. And so is billionaire hedge-fund manager Paul Tudor Jones, one of the investors who was credited with calling the 1987 stock-market crash. In a recent interview with CNBC, Jones shared “If they (the Fed) treat these numbers (inflation), which were material events, they were very material, if they treat them with nonchalance, I think it’s just a green light to bet heavily on every inflation trade.” He ended his interview by saying this “I want 5% in gold, 5% in bitcoin, 5% in cash, 5% in commodities…I don’t know what I want to do with the other 80% because I want to see what the Fed is going to do.”

¹Source: Investing.com. Gold prices from XAU / MYR, KLCI and Bitcoin prices taken from 31 May 2021 – 30 June 2021

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