Understanding the Gold Market Relative to Current Economic Conditions

Since this year began, we have seen a correction in the price of gold corresponding to the increasing rates of interest/bond yields. Gold has also been beat by the strengthening U.S. dollar, highlighting its negative correlation to the price of gold.

We have also seen the price of spot gold drop to its current $1,666.45 from the $1,801.40 recorded at the start of 2022. Last month, gold dropped to its lowest level since 2020, driven by expectations of an increase in interest rates by the Fed. Thus far, the Federal Reserve has raised rates of interest five times in an effort to combat high inflation. It is expected that when the Federal Open Market Committee meets next month, interest rates will increase again.

Investors interested in gold have been cautioned that the precious metal’s market may continue struggling to the year’s end as higher rates of interest support the U.S. dollar. In a recent report, Heraeus Precious Metals’ commodity analysts stated that the dollar’s strength would continue to depress the price of gold, as long as the Federal Reserve continued on its present path.

Experts believe that the markets will not see any pivot until the end of next year. Despite this, there are new trends that point to light at the end of the tunnel for this valuable precious metal. Those trends include a shift in gold-purchasing from Western to Eastern/Asian markets and investors ditching U.S. Treasuries. Experts also believe that we are at the point in the metal’s cycle right before gold turns upward.

Recent data shows that gold has actually performed well this year, having outperformed foreign and U.S. bonds, foreign stocks, the S&P 500, the NASDAQ and U.S. Treasury Inflation-Protected Securities. Only the U.S. dollar, oil commodities and agricultural goods outperformed the precious metal.

Rising bond yields show that investors believe that the Federal Reserve will take whatever measures it can to reduce inflation and will triumph without crashing the economy. However, if the Federal Reserve cannot control inflation due to the weakened state of the economy, it will revert back to loose monetary policies, which will positively influence gold’s performance.

Additionally, with geopolitical and recessionary risks increasing, we may see investors employ the use of more defensive strategies, making use of quality assets such as gold to help decrease losses in their portfolios. This will encourage the demand for this precious metal as an investment hedge for the long term, just as it will have a beneficial effect on the stocks of entities such as Newmont Corporation (NYSE: NEM) (TSX: NGT).

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