Investors can invest in gold through exchange-traded funds (ETFs), buying stock in gold miners and associated companies, and buying a physical product. These investors have as many reasons for investing in the metal as they do methods to make those investments.
Some argue that gold is a barbaric relic that no longer holds the monetary qualities of the past. In a modern economic environment, paper currency is the money of choice.
They contend that gold’s only benefit is the fact that it is a material that is used in jewellery. On the other end of the spectrum are those that assert gold is an asset with various intrinsic qualities that make it unique and necessary for investors to hold in their portfolios.
Price of Gold in 2022
The rise in the price of gold has come to a halt, and it is currently 1.8 percent lower than its 2022 starting point of $1,815 per ounce, as of today (18 January).
It had fallen as low as $1,783 per ounce at one point before a 2.5 percent rally recouped a significant portion of the loss as the market reacted to a falling dollar and an increase in tensions over Ukraine.
Still, uncertainty over the path and impacts of Omicron is a significant aspect of the situation. Price is currently going sideways, maybe stopping as the Federal Open Market Committee examines the most recent data.
What is the outlook for the price of gold in the upcoming calendar year? Should you think about establishing a long or short position in the market?
If you’re looking to get some gold, you’ll find this article interesting: Best Ways To Buy Gold In 2022
In response to the Federal Reserve’s announcement that it would “begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities” on 3 November, the gold price fell from $1,783.90 per ounce at the end of October to $1,763.90 on the same day.
The price of gold rose to a five-month high of $1,872.80 an ounce on November 17, when the Federal Reserve signalled that it would not hike interest rates immediately.
Due to the Bank of England’s (BoE) decision not to raise interest rates, the gains were accelerated, contrary to projections.
Higher interest rates can be detrimental to the price of gold because investors are more likely to shift their money away from gold holdings and into assets that yield interest.
The gold price, on the other hand, has since fallen as the US currency has risen in reaction to better US retail sales, as well as an increase in US Treasury yields following the nomination of Federal Reserve chairman Jerome Powell for a second term.
As a new Covid-19 version appeared at the end of November, the market found support at $1,780 an ounce, which was close to its 50-day and 200-day moving averages (MAs).
However, the price fell to $1,776.50 on November 30 and continued to plummet into early December, falling to $1,762.70 on December 2 as a result of the Brexit vote.
As reported by the World Gold Council, global exchange-traded funds (ETFs) invested in gold experienced their first month of inflows since July, while central banks in developed countries increased the amount of gold they held in reserve for the first time since 2013. (WGC).
Net long positioning on the Comex exchange changed in response to changes in the price of commodities.
WGC’s comments stated that net long holdings increased to 882t (US$52 billion) during the first half of the month, the highest tonnage level since early August 2020 – around the time when gold prices touched a record high of US$2,067/oz.
Managed Money traders, on the other hand, reacted to Powell’s reappointment by reducing their positions to 731t (US$42bn) at the end of the month, in keeping with the decrease in the price of gold.
Factors Affecting the Price of Gold
The following are the most common factors that influence the price of gold:
Monetary policy/Federal Reserve Speech
The Federal Reserve’s monetary policy, which is in control of gold prices, has the potential to have the greatest impact on gold prices. In part, this is due to a component known as “opportunity cost,” which has a significant impact on interest rates and gold prices.
The concept of opportunity cost refers to the idea of foregoing an almost assured benefit in one investment in exchange for the possibility of a bigger gain in another.
Bonds and certificates of deposit (CDs) are currently yielding nominal returns that are less than the rate of inflation in the United States, as interest rates remain near historic lows. This results in nominal gains, but real money loses as a result.
Read more: Money Market vs Certificate of Deposits: Which is Better?
Because the opportunity cost of foregoing interest-bearing assets is so minimal in this case, gold becomes an enticing investment prospect despite the fact that it offers a zero per cent yield.
The same can be said about rising interest rates, which increase the yields on interest-bearing assets while simultaneously increasing the cost of capital.
In other words, if lending rates climb, investors would be more likely to forego gold because they would be netting a larger assured return as a result.
Statistical information on the economy
Another factor that influences gold prices is economic data from the United States. Various economic data points, such as job openings and closings reports, salary data, manufacturing statistics, and broader-based data points, such as GDP growth, influence the Federal Reserve’s monetary policy decisions, which in turn can have an impact on gold prices.
An improving U.S. economy — with low unemployment, job growth, manufacturing expansion, and GDP growth in excess of 2 per cent — has a tendency to push gold prices lower, though this is not a given.
Economic growth strongly suggests that the Federal Reserve may decide to tighten monetary policy, which would have an impact on the opportunity cost dynamic outlined above.
On the other hand, poorer job growth, rising unemployment, weakening manufacturing data, and substandard GDP growth can all contribute to a dovish Fed scenario, which can lead to a rise in the price of gold.
Supply and demand are two sides of the same coin
Simple supply and demand economics can have an impact on the price of real gold, despite the fact that it is a frequently disregarded subject.
Increased demand for a good or service combined with a limited or non-existent supply has a tendency to drive the price of that good or service higher, as with any other good or service.
In contrast, an excess supply of an item or service in the face of stagnant or weak demand can cause prices to fall.
Inflation
Inflation, or the rise in the cost of goods and services, is a fourth factor that can have an impact on gold prices.
However, while not a guarantee, rising or higher levels of inflation have the tendency to push gold prices higher, and falling or lower levels of inflation or deflation have the opposite effect on gold prices.
Changes in the value of currencies
A further important factor is the movement of currencies, particularly the value of the United States dollar because the price of gold is denominated in the currency of the United States.
Because other currencies and commodities around the world appreciate in value as the dollar declines, a weakening dollar has the effect of driving gold prices higher.
ETFs
ETFs, or exchange-traded funds, are more than likely the least influential of these seven factors on gold prices, with their activities having the smallest impact.
Although exchange-traded funds (ETFs) are not intended to be market movers, they are still worth discussing.
Uncertainty
Finally, the general aspect of uncertainty might have an impact on gold prices.
There is no single element that can be given here that properly captures the uncertainty that might cause gold to fluctuate, but political uncertainty and/or instability is perhaps the best example of how gold can be influenced by uncertainty.
To put it another way, the stock market craves certainty, and it is frequently the opponent of rising gold prices.
Future Outlook on Gold
Investor optimism, fueled by the introduction of newly developed vaccines in the first quarter of 2021, is likely to have contributed to a reduction in portfolio hedges.
This had a detrimental influence on gold’s performance and led to outflows from gold-related exchange-traded funds.
The remainder of the year was characterized by a tug-of-war between opposing forces.
As a result of the uncertainty surrounding new versions, as well as the increased dangers of persistently high inflation and a comeback in gold consumer demand, gold prices have risen in recent months.
Rising interest rates and a stronger US dollar, on the other hand, continued to be a headwind. However, the strength of the dollar resulted in positive gold returns in several local currency terms, including the euro and the yen, among other currencies.
The World Bank expects that the price of gold would decline to $1,740 per ounce in 2021 from an average of $1,775 per ounce in 2020, resulting in a net drop of $1,740 per ounce.
The gold price is predicted to decline by 10% over the next ten years, reaching $1,400 per ounce by 2030.
The Federal Reserve’s approach to monetary policy will be a significant factor in determining the direction of gold prices in the future.
The Federal Reserve is likely to begin raising interest rates in 2022, which would be a negative development for gold.
The reason for this is that when interest rates rise, the relative cost of investing in gold rises as well because gold is a non-dividend paying asset that does not pay dividends or interest.
Investors may find gold to be a less desirable asset to have in their portfolios in a rising-rate environment, which might have an influence on future investor holdings of gold and put downward pressure on the price of the precious metal.
Despite rising 10-year Treasury yields, according to Wade Guenther, a partner with the New York-based investment firm Wilshire Phoenix, inflation and inflationary expectations can help to keep gold prices in check.
“While inflation has proven to be less ‘transient’ than anticipated, it will most certainly be difficult to control in the face of ongoing concerns such as supply chain disruptions, rising energy prices, and so on.
Aside from that, anticipated volatility in the equities markets could shift attention back to gold, which has long been recognized for its proven role as a portfolio diversifier and hedger “he explains.
Is Gold Still a Good Inflation Hedge?
Gold has traditionally been seen as a safe-haven asset that preserves buying power against inflation during difficult economic times, owing to the fact that it tends to keep its value over the long term despite variations in the price of gold.
Gold has historically been an excellent hedge against inflation because its price tends to rise when the cost of living increases. Over the past 50 years investors have seen gold prices soar and the stock market plunge during high-inflation years.
According to Mahesh Agrawal, assistant director at Acuity Knowledge Partners, even though there is an inverse relationship between gold and inflation, that relationship could collapse in the short term due to a number of factors such as bond yields, U.S. dollar volatility and other risks having a greater impact on gold than inflation. However, as long as the current inflationary environment continues, gold is expected to reclaim its inflation-hedging role.
Conclusion
With its long history as a store of value, gold has traditionally been used by investors to guard against stock volatility, currency fluctuations and other market risks.
But with gold prices treading water in the past year as other asset classes, including cryptocurrencies, have appreciated greatly, many investors are wondering whether gold is still worthy of a place in their portfolios.
FAQs
The year 2022 turns out to be a good time to own gold. After a lacklustre 2021, the price of gold increases to above $2,000/ounce in anticipation of and, subsequently, in response to a depreciating dollar and lower interest rates resulting from these new fiscal and monetary stimulus measures.
The idea behind the gold investment is that the underlying value of gold increases over time. Historically this rate of increase is higher than inflation, so the value of your investment increases in real terms. Investing in gold can take the form of physical bars and coins, gold equity funds, mining shares or ETFs.
If you’re wondering how to buy a gold investment, then the simplest and safest way is to buy online from a reputable dealer. Research into the broker first and ensure they have a track record. They may be able to offer you guidance as to which coins and bars to buy.
For example, gold bars are available in various sizes such 1oz, 100g and 1 kilo and you may need dealer advice as to which is the best to buy for your circumstances. You can either receive the gold yourself or have the dealer store it for you. When the price has risen over time, sell the gold at a profit.
Gold is a unique asset: highly liquid, yet scarce; it’s a luxury good as much as an investment. Gold is no one’s liability and carries no counterparty risk. As such, it can play a fundamental role in an investment portfolio.
Between the two, silver is much more similar to gold than bitcoin, but all three share a common trait (at least in the eyes of their respective investors) as market or inflation hedges.
Like gold, silver can also be used to make products or worn as jewellery. Bitcoin is a much newer asset, and without the centuries of data to draw on, its viability as a hedge is highly speculative compared to gold.
References
- thebalance.com/should-you-buy-gold/#toc-frequently-asked-questions-faqs
- investopedia.com/articles/basics/08/invest-in-gold.asp#toc-gold-as-a-hedge-against-the-dollar
- money.usnews.com/investing/articles/should-you-invest-in-gold
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