Gold has been on a roller coaster ride in 2022. First, the stronger-than-expected U.S. inflation data significantly increased the Federal Reserve's chances of raising interest rates. Although gold is regarded as a hedge against inflation, the opportunity cost of owning it rises when interest rates rise.
Lately, the dollar index has been softening a little, lowering the price of gold for buyers abroad. Following an unexpected U.S. August consumer prices increase, gold rates experienced their largest one-day percentage decline since July 14 in the previous session.
The dollar also experienced its best day since March 2020. A semblance of normalcy returned to international equities markets following the meltdown caused by higher-than-expected American inflation. However, the S&P 500 fell further than 4%, and the Nasdaq 100 dropped more than 5% in one day, marking the largest share decline in more than two years.
Even though gold is frequently considered a safe haven asset, it is still a produced good and is subject to the same economic forces as other commodities. As a result, it is very difficult for gold to have a sustained bull market.
Market speculations play an important role in actual gold spot price fluctuations. For instance, investors who spend their lives studying the market speculate based on government and central banks. When such announcements are made, pricing can fluctuate. This, when fueled by existing market conditions, can create a fiery mix. This is where hedging comes into place. It buffers the market against these volatilities, thus causing a change in the gold spot price.
Less than 10% of gold is mined for industrial uses (such as rheumatoid arthritis medications and dental bridges), leaving the remaining 90% to be retained and subsequently sold at the buyer's discretion, whether in the form of bullion, coins, or jewelry. The overall supply of gold is essentially constant. The price drops in when there is a bear market or a sudden increase in supply.
Ideally, the relationship between gold and interest rates are inversely proportional. The rule-of-thumb states that a high gold price is a marker of an increased standard of living. When interest rates rise, the price of gold inevitably drops. The recent hike in interest rates by US Federal Reserve (also known as The Federal Reserve System or simply Fed ) resulted in a 0.2% dip in spot gold price.
It is not surprising to see a sell-off in gold as inflation fears begin to fade. This is what the U.S. Gold market has been witnessing as of late. The fear of a global economic downturn has caused a dramatic decline in the prices of numerous commodities.
High demand for gold resulted from China's economic expansion. However, in the first half of 2015, demand decreased by around 24% as a result of the current economic slump in the nation, resulting in reduced pricing.
Similar to interest rates, dividends (or the stock market in general) have an inverse correlation with gold spot price. When the performance of the stock market goes up, the price of gold falls, and vice versa. Dividends are also available with equity-based gold EFTs, thus offering some level of risk protection.
Central banks, historically among the biggest buyers of gold, are buying less of it, particularly in emerging markets. However, they stockpile dollars to offset withdrawals if the U.S. hikes interest rates.
The constant ups and downs and highs and lows in the market have had an obvious direct impact on the performance of gold spot price. It is established that factors such as the war between Russia-Ukraine resulted in gold prices rising around February 2022, reaching about $2072 per ounce. However, this was followed by a correction to around $1800 in mid-May 2022. Geopolitical turmoil also has an effect on the dollar.
In addition, inflation seems to be at an all-time high and can be impacted by government direct money supply expansion. However gold remains a rarity and a precious metal with value. Therefore, it will continue to yield power.
As alternatives to owning gold stocks, investors can leave their money as an inheritance through the use of gold jewelry, coins, and bars.
Predicting with certainty if gold is a good investment will always depend on multiple factors at any given point. However, it has historically always strengthened investment portfolios, making it a reliable choice.
Your unique situation and level of risk tolerance will determine if gold is a good investment for your portfolio at this time. Ensure through research and never risk investing funds you cannot afford to lose.
Gold will continue to remain a safety net for investors during tumultuous global scenarios. History proves that it will continue to be an asset, a sign of wealth, and a high-value symbol.
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