The 2 Reasons Why Gold Is Currently Struggling to Play Its Role as a Safe Haven.
A strong dollar and inflation are hurting the precious yellow metal.
What is happening to the precious yellow metal, which has been recognized as the reference reserve of value for centuries, in the face of inflation?
The clouds are gathering over the economy with the war in Ukraine, galloping inflation, rising interest rates, ..., and the price of gold continues to decline. Gold has thus reached, on Friday, July 22, 2022, its lowest level since the beginning of the year 2022, around $1,700:
The peak of March 2022 at the beginning of the Russian invasion in Ukraine, at $2,039, close to its historical record of 2020, seems now very far.
The rise of the greenback in recent months is not unrelated to this downturn. The price of an ounce of gold, the reference on this market, is denominated in dollars. And when the US currency regains strength - the dollar is now almost at parity with the euro - gold, like commodities in general, tends to plunge.
A high dollar increases the cost of gold. This is not the only reason for this decline. The precious yellow metal has a flaw. It does not generate income. This is a serious handicap in the context of galloping inflation. When prices soar, savings that earn little or nothing are eroded. Other investments, also considered safe havens, take over in the investors' portfolio.
Those looking for risk-free products will more easily turn to US Treasury bonds, which today yield 3% over ten years than to gold.
An asset considered tangible and uncorrelated with financial markets
Other phenomena can contribute to the price of the precious yellow metal downwards. It is used in the electronics and computer industry. The decline in demand for gold for industrial purposes may also be a factor. Finally, the plummeting stock markets may have pushed some large portfolios to sell.
We cannot rule out institutional selling, to free up some liquidity. These considerations do not prevent individuals from continuing to buy precious metals in specialized stores where one can buy or sell coins, ingots, or bullion. They are not the ones who make the prices, but the activity of the private individuals remains sustained despite everything according to the experts in the sector.
The current period of uncertainty and fear for the future is boosting sales. The future is uncertain and people are worried. They are not buying to make a profit, but to secure their money.
Indeed, gold retains its intrinsic qualities. It is a tangible asset, which can be touched. It is also uncorrelated with the financial markets. In recent months, gold has done better than the stock market, which has been in sharp decline since the beginning of 2022. This is even more true for Europeans who benefit from a favorable exchange rate effect. Expressed in euros, gold has gained 6% since the beginning of the year. Europeans benefit here from the weakness of the euro against the US dollar.
The yellow metal is also and above all a portfolio fund investment. It is wise to hold a little of it - 5 to 10% of one's wealth - to cushion the shocks on other asset classes. In this sense, it keeps, and probably for some time to come, its status as a safe haven until the new generations take over in society and Bitcoin becomes the reference in a world where everything will be digital.
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