Stocks and bitcoin may have fallen, but gold prices just hit a six-month high above $1,800
The S&P 500 is down more than 20% in 2022. Bitcoin is down over 65%. But gold? It’s up 1.3%. Classic inflation protection worked its magic in a wild year for investors, but it wasn’t the strong performance that many gold bugs were expecting.
The lack of impressive yields is largely due to the fact that central banks around the world have been aggressively raising interest rates to fight inflation. Rising interest rates have boosted the value of gold’s competitors – the US dollar and US Treasuries – causing prices to stagnate below $2,000 an ounce.
“What should have been smooth sailing for gold became the perfect storm,” Mobeen Tahir, investment strategist at WisdomTree, explained in a CNBC interview last week. “A rising US dollar and rising Treasury yields became headwinds for gold.”
But in recent weeks, as the US dollar’s strength waned, gold prices have soared to a six-month high. And the precious metal received another boost from China’s decision to further ease its COVID-19 restrictions this week.
Gold futures rose about 1% on Tuesday to $1,822 an ounce after trading as high as $1,838 in the morning hours.
Analysts believe demand for gold will increase as China, the world’s largest single market for the metal, reopens. There are also a number of potential tailwinds for gold heading into next year.
If the Federal Reserve pauses or slows rate hikes, US Treasury yields fall, or US economic data deteriorates while inflation remains high, gold will outperform.
“Those are sort of Goldilocks terms for gold. Perfect for gold conditions,” said Tahir.
But in the World Gold Council’s Gold Outlook 2023, analysts said they expect “stable but positive performance for gold” over the next year amid competing headwinds and tailwinds.
On the one hand, mild recessions bode well for gold, as does a weakening US dollar and rising geopolitical tensions. On the other hand, inflation is expected to fall in 2023, which could lead investors to riskier assets.
“Lower inflation should mean potentially lower interest in gold from an inflation hedging perspective,” the analysts wrote.
Higher bond yields have also historically turned investors away from gold, but analysts at the World Gold Council said they believe yields are not high enough to significantly hurt prices.
“While higher bond yields are associated with lower gold yields and may be found attractive by some investors, historically current yield levels are not an impediment to gold performing well, especially when factoring in a weaker US dollar,” they wrote.
For investors, WisdomTree’s Tahir noted that it’s important to remember that “every gold rally has a silver lining.”
“Many investors could express their optimism on gold over silver over the next year,” he said, noting that the two precious metals often moved in tandem, with silver generally posting better returns.
Silver prices are up nearly 1.5% on Tuesday and up about 15% over the past month.
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