When it comes to selecting assets for your portfolio, having a long-term outlook is key. Gold is no exception: It has risen significantly over the long run. But as with any commodity, the price of gold can increase or decrease for any number of reasons in the short term.
You might hear a market commentator refer to a temporary slip in gold’s price from its recent peak as a gold “pullback.” When some consumers see or hear news of a short-term pullback in gold, they may become hesitant to buy or sell gold at that time. But for those who have followed gold’s growth potential over time, a gold pullback often presents an opportune time to add additional gold to their portfolios and capitalize on what may be only a short-term drop in the price of gold.
What Can Cause a Gold Pullback?
When referring to a drop in price as a pullback, experts often expect that the asset in question will soon bounce back. By contrast, a “consolidation” or “correction” is more severe and may be expected to last longer. A correction involving gold, for instance, would typically refer to a 10–20% drop from the most recent price peak.
Gold’s historical performance has shown a long-term uptrend. Over the past 20 years, for example, gold has seen an impressive increase of around 477%. That said, prices do fluctuate based on an array of factors, including supply, demand, and general economic conditions. One example of this was seen just two months ago in March 2022. Prices began the month at $1,922/oz. and over the next 31 days rose as high as $2,039.05/oz. and dipped as low as $1,910/oz. before ending the month slightly up at $1,942/oz.
Several things can lead to a short-term gold pullback. These include:
- An increase in consumer confidence about the economy and the political climate. Conversely, gold prices tend to rise in times of economic and political uncertainty, as people seek safe havens for their wealth.
- A decrease in industrial demand for gold. Conversely, increases in industrial demand have coincided with spikes in gold prices.
- An increase in the strength of the U.S. dollar. Appreciation of the U.S. dollar may trigger less demand for gold. When the value of the U.S. dollar weakens, gold prices typically go up.
- Central banks like the U.S. Federal Reserve purchasing less gold. Since central banks are major purchasers of the precious metal, a significant reduction of demand from central banks could increase supply and cause a gold pullback. When central banks are bullish on gold and buy more, the available supply may be reduced and spark a hike in gold prices.
What Can You Learn from a Pullback?
When a gold pullback occurs, it’s wise to examine market conditions to see which economic factors may be affecting the price of gold. For instance, is inflation in check? Are central banks reducing their gold purchases? Could consumers be moving more of their money into more traditional assets like stocks? Those factors may contribute to a pullback.
Additional information may be found by comparing current economic data with data from previous pullbacks. Finding the similarities and differences among these market conditions may help guide your decisions about purchasing gold.
Be sure to couple this research with insights from professional analysts about what may be affecting the price of gold. These insights can be assets in formulating a gold-buying strategy that works best for your unique financial situation and goals.
Reasons to Buy During a Gold Price Change
Gold pullbacks are generally viewed as buying opportunities. Here are four reasons why:
- Buying the dip: This strategy refers to buying an asset, such as gold, when the price is temporarily deflated and is expected to climb again.
- Diversification: A pullback makes it more affordable to add additional diversification to your portfolio in the form of precious metals.
- Gaining a financial hedge: Historically, gold has been seen as a hedge against market turbulence and economic uncertainty.
- Buying with confidence: While gold may be experiencing a temporary pullback, its price has historically gone up over the long term.
As with any asset, gold has experienced both growth and pullbacks. But during my time as Director of the U.S. Mint, and now as President of U.S. Money Reserve, I have seen firsthand the importance of gold’s role in the diversification strategies of those who choose to add it to their portfolios. For those who trust gold’s power as a protective asset and believe in its growth potential, a pullback may be an advantageous time to buy.
Still deciding whether to buy? Request your free Gold Information Kit today and learn everything you need to know about buying gold, storing gold, and incorporating it into your everyday and retirement portfolios.