It should be the perfect time to own gold. The yellow metal historically bounces back when inflation is high, as it is a physical investment that can serve as a store of value.
It is also generally a firm asset and favorite during periods of geopolitical uncertainty, seen as a safe haven.
But gold prices did not rise. In fact, they are down nearly 20% from their recent peak in March. This puts gold on the brink of a bear market.
“Investors don’t have much of an appetite to hold gold in the current environment,” said Warren Patterson, head of commodities strategy at ING.
Gold prices soared in early March as fears mounted over the fallout from Russia’s invasion of Ukraine. Since then, however, other market dynamics have come to the fore.
They call this the “Fed effect”. The central bank has aggressively raised interest rates in an attempt to reduce inflation, which remains stubbornly high, especially as the war in Ukraine bolsters food and energy prices.
The Federal Reserve raised rates on Wednesday by three-quarters of a percentage point for the third straight meeting, an unprecedented move. It also signaled that significant highs could be on the table in November and December.
That action pushed the US dollar to a new two-decade high. The dollar is up 16% against a basket of major currencies so far this year, a big increase.
These moves have hurt stocks. But they are also affecting gold.
This is in part because transactions in commodities, including gold and other precious metals, often take place in dollars. A stronger currency makes it more expensive for foreign investors to buy and can reduce demand, pushing prices down.
Another factor is the effect of the Fed’s harsh bullish cycle on US government bonds. Yields on these bonds, which move at opposite prices, rose as the Fed tightened policy. The yield on the benchmark 10-year US Treasury bond was 3.77%, up from around 1.5% at the start of the year.
Gold also competes with government bonds as a safe investment. And while investors can get better returns on the latter, the former looks far less attractive.
Patterson put it this way: “If you are raising interest rates, what would you rather hold, gold or something that will provide you with income?”
This week made it clear that central banks are not planning to change course anytime soon, putting the task of controlling inflation as a priority.
After the Fed announced its latest rate hike, others followed. The Bank of England pushed rates in the UK to their highest level since 2008. Sweden, Indonesia, Vietnam, Norway and Switzerland also rose.
This means that gold is unlikely to post a return in the short term. For that to happen, the picture on inflation would need to change, Patterson said.
“It’s really hit home this week,” he said. “You are seeing monetary tightening in general from most central banks out there.”
Source: CNN Brasil