Over the past year, investors have had to navigate very choppy waters, with aggressive interest rate rises, high fiscal debt, geopolitical tensions and supply chain issues painting a very murky picture. We have however, seen some resources, such as energy, perform well, due to a large imbalance between supply and demand. One commodity which many professionals and investors alike expected to fare better than it has thus far is gold. Today we will take a look at why gold has underperformed in comparison to gross expectations and the potential outlook for the metal.

In March this year, the gold price touched just above US$2,050/oz. Due to the metal’s demand during times of geopolitical unrest and uncertainty, Russia’s invasion of Ukraine in February helped boost the price to these recent highs. The March quarter also marked the beginning of unprecedented inflation, with figures beginning to indicate the magnitude of the issue we now know to be so significant. Gold has also typically been used as a hedge against inflation. So with both these robust catalysts combining simultaneously, why did the price of gold drop from $2,050 in March to a yearly low of $1,620 in November?

The main contributing factor has been the aggressive interest rate rises by the US Federal Reserve. Gold is priced in US dollars, and interest rate rises result in a stronger dollar, which in turn devalues any asset priced in it. The US Federal Funds Rate was at 0.25% for most of 2020 and all of 2021, and six rate rises in 2022 brought the figure to the current level of 3.82%. Furthermore, higher interest rates reduce the appeal of owning gold as it is a non-yielding asset, as many investors aim to receive a return on their capital which is greater than the cash rate. Hawkish commentary from the Chair of the Federal Reserve of the US, Jerome Powell, also encouraged a strong sell off of the metal mid-year. 

Towards the beginning of the year, many investors were also claiming that rather than investing in gold, there are alternative methods to inflation hedges, such as bitcoin. This idea seems to have died down, however, with bitcoin being down 63.2% YTD, in comparison to 0.9% that of gold.

The gold market has had a strong November, posting gains of approximately 8% and seemingly breaking the downtrend the metal has been in for most of the year. A retreat in the value of the US dollar and expectations that the Fed will slow the pace of rate rises increased investors’ confidence and interest in the metal. Markets remain extremely volatile, making it difficult to grasp long-term trends. History does show, however, that the greatest gains to be made are when assets are out of favour as the tide tends to turn.

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Joseph Raad: 

“Why did the price of gold drop from $2,050 in March to a yearly low of 1,620 in November? Over the past year, investors have had to navigate very choppy waters with aggressive interest rate rises, high fiscal debt, geopolitical tensions, and supply chain issues, painting a very murky picture. One commodity, which many professionals, investors alike, expected to fare better than it has thus far is gold.

In March this year, the gold price touched just above US $2,050 an ounce, due to the metal's demand during times of geopolitical unrest and uncertainty, Russia's invasion of Ukraine in February helped boost the price to these recent highs. The March quarter also marked the beginning of unprecedented inflation with figures beginning to indicate the magnitude of the issue we now know to be so significant.

Gold has also typically been used as a hedge against Inflation. So with both these robust catalysts combining simultaneously, why has it come off so much? The main contributing factor has been the aggressive interest rate rises by the US Federal Reserve. Gold is priced in US dollars and interest rate rises results in a stronger dollar, which in turn devalues any asset priced in it.

Furthermore, higher interest rates reduce the appeal of owning gold, as it is a non yielding asset and many investors aim to receive a return on their capital, which is greater than the cash rate. Towards the beginning of this year, many investors were also claiming that rather than investing in gold, there are alternative methods to inflation hedges such as Bitcoin. This idea seems to have died down.

However, with Bitcoin being down 63% year to date in comparison to about 1% that of gold. The gold market has had a strong November posting gains of approximately eight percentage.  A retreat in the value of the US dollar and expectations that the FED will slow the pace of rate rises has increased investors'   confidence and interest in the middle markets do remain extremely volatile, making it difficult to grasp long-term trends. However, history does show that the greatest gains are to be made when assets are out of fafa.

For more information on gold, or if you would like to discuss some Asex gold stocks, please click on the link in the description.”

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