The rise in inflation has led several central banks to tighten monetary policy, with the U.S. UU. The Fed raised its benchmark one-day interest rate by 75 basis points on Wednesday. Gold is very sensitive to the rise in the US.
Interest rates, since they increase the opportunity cost of holding unprofitable ingots and, at the same time, boost the dollar, at which it is traded. Do you have any confidential news? We want to hear from you. Get this in your inbox and learn more about our products and services. The curious case of the fall in gold prices.
So, what is behind the curious case of a fall in gold prices?. Let us know when is a good day and time to contact you. Gold continues to face a strange combination of headwinds and headwinds. Inflation soars into double digits, gold seems stuck in the mud.
Gold doesn't pay interest, so it always competes with interest-bearing assets, such as bonds. For the past few months, the Federal Reserve has intentionally raised interest rates at a record pace. The following graph shows the rise in interest rates in the U.S. For that reason, the Federal Reserve cannot allow interest rates to rise too high.
Rising interest rates also harm the economy and stock prices. The Federal Reserve has an interest in protecting the economy and the stock market, which limits how far rate hikes can go. The dollar is also responsible for suppressing the price of gold. When the dollar rises against foreign currencies, gold becomes more expensive for foreign investors.
The dollar also competes with gold as a safe haven asset. When exiting risky assets, investors usually choose between bonds, gold or cash. This year, most people have chosen cash. However, there are two reasons why this dynamic is unsustainable.
Cash loses purchasing power at a record pace, limiting the amount of time investors are willing to stay in cash. Investors, both individual and institutional, are looking for an opportunity to redistribute their cash. If the economy sinks into a recession or if inflation remains high, stocks and bonds look pretty daunting. In a way, a rising dollar is good for the U.S.
Consumers have more purchasing power compared to international products. However, the threats of a rise in the dollar are likely to outweigh the benefits. A rising dollar hurts the revenues of multinational companies. When they receive foreign currencies abroad, they must convert them to dollars at a reduced rate.
A strong dollar also hurts emerging market economies. Copper, oil, gold and many other commodities are priced in the U.S. The rise in the dollar makes commodities more expensive in emerging markets, worsening inflation and increasing pressure on economic production. Emerging market economies also have debt denominated in dollars.
When the dollar rises, servicing your debt becomes more expensive. . Gold's mediocre performance can be frustrating for new investors in precious metals. Isn't gold supposed to protect against economic disasters? Isn't this the perfect environment for gold to take off? The answer is yes.
However, gold investors must face the same harsh reality they have faced for 50 years. Downtrends are long and boring, while uptrends are short and explosive. Bull markets are slow and stable, while bear markets are short and violent. Investing in gold requires an uncomfortable amount of patience.
But, when things start going your way, they go your way quickly. Right now you have the chance to board a rocket. It's better to climb now than at the peak of your flight path, when everyone else is clamoring for a seat. That's when you can calmly go out, collect profits, and go on your way merrily.
Your weekly commentary on the gold market comes from our in-house team of researchers and technical experts. Vaulted gives modern investors access to physical ownership of gold with the industry's best cost structure. With personalized advice from industry experts and access to top-notch precious metals strategies, Vaulted is the key to lasting financial prosperity. The world is not prepared for a wave of sovereign debt defaults (Financial Times) The strength of the dollar drives the pullback in commodity markets (The Wall Street Journal) Global central banks step up the fight against inflation (The New York Times) Diverging employment data raises questions about the health of the labor market (The Wall Street Journal) The housing boom fades around the world as they rise interest rates (The Wall Street Journal) Vault is backed by McAlvany Financial Group, owner of ICA, one of the largest and oldest full-service gold brokerage firms in the United States.
This makes gold more expensive for foreign investors because gold transactions are usually made in dollars. ETF stocks are expected to continue to fall but remain near historically high levels, which will also affect the price of gold. The risks of a hard landing are high and this has only continued to drive flows into the dollar, which has been bad news for gold. That puts the precious metal on the cusp of a bear market, which is strange because this should be the perfect time to own gold.
On a positive note, central banks continue to add gold to their reserves, especially Turkey and Egypt. The World Gold Council, the market development organization for the gold industry, recently opined that the commodity will face two key obstacles. Vaulted is backed by McAlvany Financial Group, owner of ICA, one of the largest and oldest full-service gold brokerage firms in the United States. The gold market narrative has been driven by the contrasting effects of persistently high inflation and by rising central bank interest rates in response.
Some investors may choose to maintain some exposure to gold in their portfolio to diversify, as a hedge against the fall in stocks and bonds. When it comes to investing in gold, very few people have the patience necessary to withstand downtrends and capitalize on uptrends. A recession would favor gold prices, but the sharp rise in interest rates used to deal with inflation has so far limited the rise of the precious metal. The outlook for the price of gold is likely to depend on how geopolitical tensions develop and on how monetary tightening affects the world economy, among other factors.