April gold futures opened at $4,899.10 per troy ounce on Tuesday, down 2.9% from Friday’s closing price of $5,046.30. This is gold’s second consecutive start below $5,000 after opening above that threshold from February 9-12.
Gold’s decline comes after positive reports on the US labor market and inflation. Last Wednesday, the Bureau of Labor Statistics reported that nonfarm payrolls increased by 130,000 in January. Analysts expected 55,000. On Friday, the Consumer Price Index report showed a 0.2% price increase in January from the previous month, bringing the annual inflation rate to 2.4%. Analysts expected a monthly price increase of 0.3% and annual inflation of 2.5%. Better-than-expected metrics likely mean fewer opportunities for the Federal Reserve to cut interest rates this year. CME FedWatch, which predicts rate change probabilities, currently shows a 7.8% chance of a quarter-point rate cut in February. Last week, the measure was 20.1%.
Persistent high interest rates generally support a higher dollar value, which can limit demand for gold.
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The opening price of gold futures on Tuesday was 2.9% lower than Friday’s close. Below is how the opening price of gold has changed compared to the past week, month and year:
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A week ago: -2.3%
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A month ago: +6.3%
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One year ago: +66.8%
On January 29, gold’s annual gain was 95.6%.
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Gold has the same high-level risk as any investment: you could lose money. And, as with other investments, a loss in gold can materialize in different ways. Understanding the possible outcomes is the first step in managing your risk when investing in gold.
According to gold experts, potential gold investors should understand these four risks:
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Price
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Speculation
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opportunity cost
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Fraud
Today we will focus on the first two: price and speculation.
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There is price risk for investors who buy gold when the metal approaches record prices. “Buying high to hope for a short-term rally is a difficult strategy,” said Darrell Fletcher, managing director of commodities at Bannockburn Capital Markets.
Despite the high prices, there is positive momentum at play for the precious metal. Fletcher noted that gold is recovering from decades of low prices and is an increasingly popular diversification asset for central banks and individual investors.
The right expectations, a long timeline, and proper allocation can limit your pricing risk. “Gold should not be seen as an engine of supercharged returns; it is there to primarily act as a stabilizer in a diversified portfolio,” explained Alex Tsepaev, chief strategy officer at B2PRIME Group.
If you are interested in learning more about the historical value of gold, since 2000.
Thomas Winmill, portfolio manager at Midas Funds, encourages investors to consider positions in gold bars, coins and ETFs as speculative. Gold is a commodity and “commodity prices depend on macroeconomic, political, industrial and financial factors that are unpredictable and, in some cases, unknowable.”
Despite its recent performance, gold is an unpredictable asset. Keeping this in mind when making trading decisions could protect you from overexposure and unrealistic expectations.
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Whether you are following the price of gold from last month or last year, the gold price chart below shows the constant rise in value of the precious metal.
More information: Alternatives to gold? How to invest in silver, platinum and palladium.