Two years after gold climbed to its highest price on record, the metal has little to show for it. It failed to regain ground above the $2,000 level, prompting investors to question its ability to serve as a safe-haven asset.
However, as some analysts point out, gold remains a key asset for long-term portfolio diversification and has outperformed the US stock market.
Although gold prices have been volatile and have fallen from their highs this year, “many investors are surprised to learn that gold has served as a relative safe haven in 2022,” says Steven Schoenfeld, CEO of the MarketVector index provider. Gold prices are down 3.1% this year as of August 25, but the
the index lost almost 12%.
Gold futures saw their most active contract settle at $2,069.40 per ounce on August 6, 2020, the highest on record. They fell to trade below the $2,000 mark consistently until March of this year when they saw settlements above that level. On August 25, prices stood at $1,771.40.
Gold prices had two “powerful surges,” in the summer of 2020 and another in early winter 2022, matching Russia’s invasion of Ukraine, according to Schoenfeld. “Gold has since corrected significantly,” he notes, attributing the pullback to a steady rise in interest rates and the “vocal articulation” of the Federal Reserve’s monetary tightening policies, which have also strengthened the US dollar.
In a speech to central bankers at the Jackson Hole retreat on Aug. 26, Fed Chairman Jerome Powell implied further interest rate hikes as the Fed continues its efforts to control inflation.
The dollar, as measured by the ICE US dollar index, is up 13% this year. It hit a 20-plus-year closing high on August 22.
The dollar’s exceptional strength against other currencies has bolstered investor confidence in the currency’s safe haven role “to the detriment of gold,” said George Milling-Stanley, chief gold strategist at State Street. Global Advisors.
Despite this, he believes that investors are “exaggerating the potential negative impact of higher interest rates” on gold prices. He points out that over the past two periods of sustained Fed tightening, gold prices have actually risen sharply, “contrary to the conventional wisdom that higher rates hurt gold investing. because they increase the opportunity cost of investing in them”. For example, in the two years from June 2004 to July 2006, when the Fed raised rates 17 times, gold rose 42%, Milling-Stanley says.
While he doesn’t rule out another test of support for gold around the $1,700 level, he points out that State Street’s base case scenario is for prices this year to be between $1,800 and $2,000. . “Current uncertainties on the macroeconomic and geopolitical fronts could bring prices back into this trading range before the end of the year,” Milling-Stanley said.
Central banks, meanwhile, continued to buy gold. This matches the trend following the 2008 financial crisis, says Steve Land, senior portfolio manager of the
Franklin Gold and Precious Metals
funds (symbol: FKRCX).
Global central banks added 180 metric tons to official gold reserves in the second quarter compared to the first quarter, according to the World Gold Council.
“Growing geopolitical uncertainty has caused central banks to hold more gold and less currency or debt from other countries,” Land says.
Still, gold markets are “difficult to predict,” he adds. Gold is a financial instrument that tends to profit from periods of economic uncertainty or fear of inflation, and it is a “luxury good”, with most of the world’s annual gold production being sold like jewelry, “which may feel pressure during economic downturns.”
“There’s usually a lot of countervailing pressure in the gold market, giving it unique price moves relative to other assets,” he says. This helps make it a “compelling addition to a diversified portfolio.”
E-mail: [email protected]