Concerns over a potential recession and market uncertainty make gold a smart investment choice this year. Investors, however, should be careful when investing in the metal until a short-term uncertainty in gold price settles down.
The short-term uncertainty that we are talking about has primarily to do with the interest rate environment. We are likely to get some clarity on it at the U.S. central bank’s May 2-3 policy meeting, when the bank is expected to raise the interest rate by 25 basis points.
Along with the interest rate, there are a few more factors that could guide the price of gold this year. So, if you are also planning to invest in gold, you need to know as much as you can about it.
Why Invest In Gold?
Investors usually turn to gold for stability, especially during times of uncertainty. A well-diversified portfolio that includes gold is a great way to protect your financial future.
With recession fears still looming, investing in gold becomes even more important. This is because when an economy slumps into a recession, the stock market dives too, and real estate also witnesses a drop in value.
During such times, investing in gold could provide much-needed diversification by reducing the exposure to riskier assets and minimizing the impact of any losses.
Another thing that makes gold a top choice of many investors is that it is considered to be a smart hedge against inflation. This is because the precious metal tends to hold its value in the long-term despite volatility in the dollar, and thus, the monetary policy changes to control inflation are a key driver of the gold’s price.
Since gold is a tradable commodity, it is denominated in U.S. dollars. This results in an inverse relationship between gold and the USD, i.e., when the USD rises against other currencies, gold gets more expensive. And, when the USD drops, gold prices go up as the precious metal gets cheaper for overseas buyers.
Liquidity is another feature that makes gold a smart investment choice. If you are facing hard financial times, like during a recession, being able to offload assets for cash quickly gives you a cushion to stay afloat on bills and other necessities.
Gold Price Trend
In 2022, the price of gold surged past the $2,000 per ounce mark in February 2022 when Russia invaded Ukraine. At the time, fear gripped the financial markets worldwide, pushing investors toward the yellow metal.
This rally in the gold ounce price was short lived as the prices soon started dropping, falling by more than 20% by September 2022. A strong U.S. dollar and aggressive interest rate hikes by the U.S. Federal Reserve (Fed) were the main factors pushing the price of gold down.
The price again changed course in late 2022 and early 2023, gaining almost 14% from November 2022 to early February 2023. At the time, a less hawkish tone by the Fed’s Jerome Powell and stronger jewelry demand pushed the prices up again.
After dropping slightly in February, the ounce of gold price breached the $2,000 mark in March, for the first time since early 2022. The market stability caused by the failure of Silicon Valley Bank and the takeover of Credit Suisse by UBS contributed significantly to the gold price rally.
Some downward pressure has been seen in gold prices lately. It is mainly due to some firming in U.S. Treasury yields and last week’s PMI data, showing an acceleration in the U.S. and eurozone business activity in April.
Inflation, Interest Rates And Gold Prices – What’s The Connection?
Gold prices, at least partly, have been driven by the contrasting impact of persistently high inflation and interest rate hikes by the U.S. Fed to control it.
In 2022, the central bank raised the interest rate six times, bringing the interest rate to 4.5% by the end of the year. This year, so far, the Fed has hiked the rate once by 25 basis points, bringing the rate to 4.75% in February. The inflation rate, on the other hand, was on the higher side last year, but now it has started to come down.
Investors tend to flee from fiat currencies toward precious metals during periods of high inflation, and we witnessed something similar in the last twelve months. It is also true that interest rate hikes can make gold less attractive, as it can push some dollars away from gold into fixed-income investments like bonds. However, the overall macro scenario has worked in favor of gold so far.
Traders expect the Fed’s next week meeting to offer clarity on rate-hike strategies, which in turn, would throw light on the progress in taming inflation.
What Do Analysts Forecast?
In March, ANZ Research upgraded its gold price due to a slowing in the Fed’s interest rate hike cycle and a weaker USD. ANZ Research expects gold to trade at $2,000 by late 2023, and rise to $2,075 by September 2024.
In March, Trading Economics forecast gold prices to stay around $1,844 by the end of the current quarter, and then drop to $1779 in 12 months.
Goldman Sachs expects the precious metal to hit $2,050 over the next year on concerns over financial stability and growth.
Bank of America, in its report published earlier this month, gave an initial price target of above $2,100 for an ounce of gold. The report noted that gold’s fundamental prospects look robust as inflation remains persistently elevated and economic concerns continue to grow. Technical indicators also point to a bullish outlook, the report noted.
Jess Felder, founder of The Felder Report, expects the price of gold to hit new all-time highs as the U.S. deficit increases. In the first half of the Fiscal year, the federal deficit ballooned to $1.1 trillion, an increase of $432 billion from the same period in the previous fiscal year.
Felder noted that a major reason for a jump in spending is the rapid rise in interest costs. Citing historical data, the analyst notes that the yellow metal is the best hedge investors have against a deteriorating fiscal situation.
Factors Driving Gold Prices
In the near term, all eyes are on the Fed’s meeting next month. Markets now see a 73% chance of a 25-basis-point rate hike at the Fed’s next meeting (compared to an 83% chance a week back). Still, some downside is expected in the gold price next week.
Although the Fed’s rate expectations have remained more or less stable so far, further resilience in the economic indicators over the coming few weeks could fuel speculations of another Fed rate hike, or at least delay the rate cut. Either way, gold could lose some of its shine.
In addition to the U.S. central bank, the European Central Bank and the Bank of England are also expected to raise rates next month.
On the other hand, a weak U.S. consumer confidence report and lackluster manufacturing data raise concerns of an economic slowdown, and in turn, reduce the chances of a rate hike next week.
U.S. consumer confidence dropped to a nine-month low in April. This data, along with mounting worries of a recession later this year, is providing a floor for gold prices. And, if yields continue to weaken, it could prove positive for the gold price.
However, much will depend on the Fed’s decision next week. Central bank officials have already suggested that the rates will remain elevated for some time to control inflation.
Additionally, worsening U.S. banking crises may further push investors toward the precious metal. This year, we have already witnessed the failure of Silicon Valley Bank and the takeover of Credit Suisse by UBS. Now, if First Republic Bank also goes down, it could create havoc in the financial markets.
First Republic Bank’s market value continues to plunge as it is unable to find buyers for assets so far. Moreover, the U.S. government, so far, has stayed away from joining the rescue process of First Republic Bank.
Amid all this negative news, on Wednesday, the Commerce Department came up with positive news on the U.S. manufacturing front to ease some recession fears. Both U.S. durable goods orders and Capital goods orders data came in stronger than expected. Despite the positive news, the gold spot price continues to hover around the $2,000 mark.
What To Do
Going forward, the price of gold will largely depend on the strength of the USD and the impact of monetary tightening on the global economy. Also, developments in the banking industry will have some say in directing the gold price.
Some analysts are advising investors to stick to the “buy on dips strategy” as the overall outlook on the yellow metal is positive. Even with this strategy, investors need to remain vigilant on the USD movement, as well as the global market triggers, such as the U.S. Dollar Index and the Fed rate hikes.
Long-term investors can benefit immensely from investing in gold. It will not only diversify their portfolio but will also help them to maintain their portfolio’s value during periods of downturn and volatility. It is, however, crucial for such investors to take into account their individual goals and risk tolerance before jumping to any investment decisions.
This post originally appeared at ValueWalk.com.