Economic Policy Could Drive or Dive Gold’s Value

Gold’s role as hedge against inflation and portfolio diversifier will continue to offer price support amid the Fed’s hawkish stance and geopolitical strife, notes a recent report from Metals Focus.

Heightened investment demand paired with volatility following the Russian invasion of Ukraine pushed the yellow metal to US$2,051 per ounce in early March, the precious metal’s second-highest value of all-time.

The dramatic price spike underscores the continued uncertainty that has plagued markets since 2020 when the yellow metal rallied to an all-time high of US$2,060.

The tailwinds of 2022 stand in contrast to last year’s performance when inflation was less pervasive and economic recovery was growing following the height of the pandemic lockdowns. Despite being a “generally supportive” environment, the yellow metal lacked direction, according to the metal’s consultancy firm.

“Rising inflation, negative real rates and pandemic uncertainties were not enough to help the gold stage a rally last year, and its price could not challenge the 2020 high,” Neil Meader, director of gold and silver at Metals Focus, said in the report’s press release.

Although gold was unable to surpass 2020 levels, extra cash and optimism led to investors being net purchasers throughout 2021, driven primarily by a 23 percent uptick in purchases of bars and coins.

“This helped gold trade in a historically high US$1,700 to US$1,900 range for most of 2021 and, in doing so, achieve a new nominal high for the annual average of US$1,799,” Meader said.

The upward trend in the nominal average is anticipated to continue in 2022 with a two percent increase bringing the annual average to US$1,830. However, the second half of the year may see some of that updraft switch to headwinds as inflationary pressures are mitigated.

“As policy rates rise and inflation declines, we expect that real rates and yields will rise materially during the second half, putting pressure on the gold price,” Meader said.

The annual Gold Focus report went on to note that gold may be able to navigate the pressure if persistently high inflation and slow economic growth lead to stagflation, an additional risk that may also add to gold’s allure as both a hedge and diversifier.

As the yellow metal finds support from its dual investment function, equities are expected to fare poorly amid the same conditions.

“Even at our forecast US$1,670 trough in late 2022, gold will be only 9 percent lower than at end-2021. Against this we expect to see double-digit declines for equities, high yield bonds and very possibly also investment-grade bonds,” he added. “Importantly, at US$1,830 in 2022, our full year average gold price forecast is an all-time high.”

Will central banks captain or crash?

Moving into H2 2022, China’s zero-COVID policy will continue to weigh on gold demand, impacting the global market as the country represents about the sixth of the world’s population and GDP.

The decisions central banks make to quash inflation and spur economic growth will also factor into gold’s ability to attract the risk averse.

“There is a very real risk that as central banks’ restrictive policy moves result in slowdowns, but inflation stays stubbornly high,” the comprehensive market review states, “the resulting loss of disposable incomes could fuel a downward spiral for profit.”

In terms of fundamentals, 2022 is likely to see a 2 percent drop in total demand stemming from a decline in Chinese consumption. On the supply side, a 2 percent or 3,642 metric ton uptick will mark the second largest annual production rate on record and contribute to the 37 percent structural increase in the surplus.

Ultimately, Metals Focus sees central banks maneuvering a “softer landing” making for a manageable economic slowing.

“We also still expect that inflation will ease over the rest of the year,” the outlook read. “As policy rates rise and inflation declines, we expect that real rates and yields will rise materially during the second half, putting pressure on the gold price.”

As of 10:00 am EST on June 8, 2022, gold was trading for US$1,846.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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