For generations, the only and best way to invest in gold has been to buy physical gold in the form of coins, bars, or jewelry. However, over time, more sophisticated forms of investing have emerged, such as gold ETFs (exchange-traded funds) and gold mutual funds.
When inflation is on the rise, equities underperform.
Purchasing prices rise due to rising inflation, consumers may lose purchasing power unless their incomes rise, and monetary policy measures to control inflation may hurt growth and the economy. ‘occupation. During such times, gold becomes a haven asset. It is always advisable for the investor to keep at least 10-15% of gold assets in his portfolio.
According to the World Gold Council report for the first quarter of 2022, gold demand (excluding OTC) increased 34% year-on-year to 1,234 tons, the highest level since the fourth quarter of 2018 and 19% higher than the five-year average of 1,039 tons. The invasion of Ukraine and rising inflation were the main factors driving both gold prices and demand.
Gold ETF holdings increased by $269 trillion, which more than reversed the $174 trillion annual net outflow in 2021. As long as uncertainty surrounding the Russia-Ukraine war and Covid-related threats persist, Gold prices will continue to benefit from safe-haven demand.
While gold is an ideal asset to own right now, it seems that its price doesn’t reflect the reality of an asset that is still in very strong demand.
So far gold prices, despite a quick leap above 2,000 dollars, have failed to stay above this level. Certainly, there are many reasons, starting in the first place from the inability to understand the future movements of the American Central Bank in terms of interest rate hikes.
The starting point is precisely this since gold does not have regular coupon flows like bonds and therefore investors often value it less. But the main factor is inflation which has never been so high in the last forty years. And that reason alone should push the price higher.
But gold takes time. Gold “has been hampered by expectations that the US Federal Reserve will now act quite aggressively to keep inflation in check ,” said Graham Smith, an investment writer at Fidelity International.
The prospect of further interest rate hikes in the US adds to the dollar’s relative attraction to real assets like gold that has no yield. Therefore, fewer dollars are needed to buy an ounce of gold, reducing its price in dollars.
So until investors get an idea of how the interest rate hike cycle and geopolitical uncertainties will impact financial markets and overall macroeconomic data, gold is unlikely to find momentum in the future. exceed $2,000 likely for the remainder of 2022.
The second factor in the crackdown has been speculation about what Russia might do with its gold reserves, one of the few assets that have not been touched by Western sanctions introduced against Russia after the invasion of Ukraine.
However, the context for choosing gold remains valid in light of the war in Ukraine, China’s economic slowdown, skyrocketing inflation, and very volatile equity markets.
