In times of turmoil, investors turn to safe havens, such as gold. Moreover, this usually offers good protection against inflation. With the current turmoil on the stock market and the extremely high inflation, you would expect the gold price to skyrocket, but nothing could be further from the truth. How did that happen?
Since April this year, the gold price has fallen by approximately 14%. “Interest rates, inflation and recession concerns are driving investors’ minds and leading to market skepticism. However, gold, the supposed safe haven, has so far failed to benefit,” IG Netherlands analyst Salah-Eddine Bouhmidi noted in a report.
The analyst states that historically the gold price often shows a positive trend between July and August, but this year it did not develop. In fact, if the gold price dips below the so-called support level of USD 1,700, the downward trend could accelerate sharply, Bouhmidi warns. At the moment the gold price is still around a level of 1715 dollars.
Rising interest rates and a strong dollar are ‘poison’ for gold
Why isn’t gold profiting from the current turmoil? Not so long ago, the gold price shot up due to all the uncertainties, for example between March and August 2020, at the start of the corona crisis. Also more recently, when Russia invaded Ukraine, the price shot up from 1797 to 2050 dollars.
But since then, prices have fallen, while uncertainties have increased. According to Bouhmidi, there are two reasons for the decline: rising interest rates and the strong dollar. These factors are “poison” to the supposed safe haven, according to the IG analyst.
What’s up with that?
How about that? In an effort to curb high inflation, central banks worldwide are raising interest rates at a rapid pace. The US Federal Reserve is particularly involved.
A higher interest rate usually does not benefit the gold price, because it makes other investments more attractive. Think bonds. You now receive 3% interest on American government bonds with a term of ten years. Gold, on the other hand, offers no return: as an investor you have to be completely satisfied with a possible price increase.
Dollar popular as a safe haven
Another reason for the pressure on gold prices is the strengthening US dollar. The greenback is currently more popular as a safe haven among investors than gold. The US economy is still growing faster than Europe’s, while the Federal Reserve is acting more aggressively than the European Central Bank to fight inflation.
Moreover, Europe in particular is suffering from recession fears due to the war in Ukraine, because the region is very dependent on oil and gas from Russia. All these factors contribute to the dollar becoming more attractive and gold losing some of its luster.
Whether the gold price will pick up again in the short term remains difficult to determine. “Since so many factors influence the gold price, it is very difficult to predict the future gold price,” Lynx investment specialist Justin Blekemolen writes in an analysis.
According to him, the gold price is in a declining trend in the short term, but gold could also arouse investor interest again if interest rates fall again due to a recession, while inflation remains relatively high. A resurgence of the coronavirus or possibly even the monkey pox virus can also lead to new unrest and thus rising gold prices, according to Blekemolen.
Read more: Is Gold Losing Inflation Hedge Status?
Justin Doornekamp is a freelance editor at Participaties.nl. Justin Doornekamp can take positions on the financial markets. The information in this column is not intended as professional investment advice or as a recommendation to make certain investments. Your response to the author is welcome.