Economic policy

Economic policy could boost or depress the value of gold

Gold’s role as an inflation hedge and portfolio diversification will continue to provide price support amid the Fed’s hawkish stance and geopolitical strife, notes a recent report by MetalsFocus.

Increased investment demand coupled with volatility in the wake of Russia’s invasion of Ukraine pushed the yellow metal to US$2,051 an ounce in early March, the second highest value ever for the precious metal.

The dramatic price surge underscores the lingering uncertainty that has plagued markets since 2020, when the yellow metal hit an all-time high of US$2,060.

The tailwinds of 2022 contrast with the performance of last year, when inflation was less prevalent and economic recovery accelerated from the peak of pandemic shutdowns. Despite a “generally favorable” environment, the yellow metal lacked direction, according to the metal’s advisory firm.

“Rising inflation, negative real rates and pandemic uncertainties were not enough to help gold stage a rally last year, and its price was unable to challenge the high of 2020,” Neil Meader, director of gold and silver at Metals Focus, said in the report’s press release. Release.

Although gold was unable to rise above 2020 levels, additional liquidity and optimism led investors to be net buyers throughout 2021, mainly due to a 23% increase. bullion and coin purchases.

“This has helped gold to trade in a historically high range of US$1,700 to US$1,900 for most of 2021 and in doing so to reach a new nominal high for the annual average of 1 US$799,” Meader said.

The upward trend in the nominal average is expected to continue in 2022 with a 2% increase bringing the annual average to US$1,830. However, the second half of the year could see some of this updraft turn into headwinds as inflationary pressures ease.

“As policy rates rise and inflation declines, we expect real rates and yields to rise significantly in the second half of the year, which will put pressure on the price of gold,” he said. Meader.

The Gold Focus annual report went on to note that gold may be able to weather the pressure if persistently high inflation and slow economic growth lead to stagflation, with additional risk also potentially adding to the attractiveness of gold. gold as a hedge and a diversifier.

While the yellow metal finds support in its dual role as an investment, equities should fare poorly under the same conditions.

“Even at our forecast low of US$1,670 at the end of 2022, gold will only be 9% lower than at the end of 2021. On the other hand, we expect double-digit declines for equities, high yield bonds and most likely also investment grade bonds,” he added. “It’s important to note that at US$1,830 in 2022, our average gold price forecast for full year are at an all-time high.”

Will central banks rein in or collapse?

Going into the second half of 2022, China’s zero-COVID policy will continue to weigh on gold demand, impacting the global market, as the country accounts for around one-sixth of the world’s population and GDP. .

Decisions made by central banks to stifle inflation and stimulate economic growth will also factor into gold’s ability to attract risk downpours.

“There is a very real risk that restrictive central bank policies will lead to slowdowns, but inflation will remain stubbornly high,” the comprehensive market review says, “the resulting loss of disposable income could fuel a downward spiral for savings.

In terms of fundamentals, 2022 is expected to see a 2% decline in total demand resulting from lower Chinese consumption. On the supply side, an increase of 2% or 3,642 metric tons will mark the second highest annual production rate on record and contribute to the 37% increase in the structural surplus.

Ultimately, Metals Focus sees central banks maneuvering a “soft landing” for a manageable economic downturn.

“We also still expect inflation to decline over the remainder of the year,” the outlook says. “As policy rates rise and inflation declines, we expect real rates and yields to rise significantly in the second half of the year, which will put pressure on the price of gold.”

As of 10:00 a.m. EST on June 8, 2022, gold was trading at US$1,846.

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Securities Disclosure: I, Georgia Williams, have no direct investment interests in any of the companies mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or completeness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the views of Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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