Is gold’s utility as an asset allocation diversifier broken, will gold prices go up? (2022)

In the past one month, both equity and bond markets have suffered amid rising inflation and fallout of the prolonged Russia-Ukraine conflict. Surely gold would have put up a better show, given its safe-haven appeal? Not quite. Gold prices have also fallen in tandem with other asset classes, compounding investors’ misery. Domestic gold prices have fallen 7% to Rs.50,450 per 10 gram from April peak of Rs.54,380 per 10 gram. So does this mean gold is not doing its job? Is gold’s utility as an asset allocation diversifier broken? Let’s find out.

Gold is traditionally seen as a safe-haven asset during times of economic strife and uncertainty. The precious metal is also viewed as an inflation hedge to protect against the debasement of fiat currencies. It tends to have a loose correlation with other asset classes, particularly equities. That is why, financial advisers usually recommend having some allocation to gold as a diversifier to cushion the investor’s portfolio during bad times. However, the yellow metal has failed to live up to its billing in recent weeks even as financial markets have tumbled. This is despite a fall in real interest rates, which is usually conducive for gold.

The answer lies in a resurgent US dollar and buoyant US bond yields. The dollar has been surging as investors rush to the safety of the greenback amid concerns over

Video: Is Gold A Good Investment?

persistent

inflation. The dollar index rose for five straight weeks to a 20 year high as US treasury yields have climbed on expectations the Fed will be aggressive in attempting to tame inflation. After its 50 bps hike earlier this month, investors expect the Fed to follow up with two more front-loaded rate hikes. This is making investors nervous, and putting them in risk-off mode. “Market fear that inflation may remain high in the near term while tightening may slow down growth caused market players to shun all riskier assets like commodities and equities and stick to the most trusted asset which is the US dollar,” says Ravindra Rao, CMT, EPAT, VP- Head Commodity Research, Kotak Securities.

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Is gold’s utility as an asset allocation diversifier broken, will gold prices go up? (1)

Gold and dollar tend to have an inverse relationship. When the dollar is on a strong footing, it makes gold less attractive for buyers holding other currencies. Rising short-term interest rates and yields in turn raise the opportunity cost of holding gold. While the Fed maintains its hawkish stance, real yields (adjusted for inflation) are expected to move higher. Positive real yield undermines demand for continue to remain in play. Central banks continue to value gold’s utility in these uncertain times and thus added 84 tonnes to global official gold reserves during the first quarter. Analysts expect central banks to continue to diversify away from dollar assets into gold. Global growth worries have only intensified in recent weeks amid mixed economic data from major economies, downbeat growth forecasts, continuing Russia-Ukraine fighting and anaemic activity in China owing to virus related restrictions.

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With so many moving parts, the likelihood of the US Fed achieving a soft landing for the economy is low, reckons Mehta. “A growth slowdown, high debt levels, and financial market instability will ensure that the Fed’s tightening is short-lived, making conditions conducive for gold again,” argues Mehta. He believes the US and other global central banks are staring at a policy error. Inflation may not come down even if interest rates are hiked as supply-side inflation persists and contributes equally. It is possible aggressive policy actions may kill inflation at the expense of growth. If central banks realise this and take a U-turn, it will lead to repricing in gold.

The yellow metal has already seen some respite as the strength in US dollar and US bond yields has started to moderate. Rao reckons gold may see some recovery soon as growth and inflation concerns increase its safe haven appeal. Experts maintain that investors should be guided by their asset allocation and keep up to 10-15% of their portfolio in gold. This can be built in a staggered manner via investments in gold ETFs or fresh tranches of Sovereign Gold Bonds. gold because gold does not yield anything.

That is why gold has been declining despite the safe-haven demand from inflation and war concerns. “The Fed’s tightening cycle will continue to put downward pressure on gold for the next couple of months,” opines Chirag Mehta, CIO, Quantum AMC. As gold lost momentum near $2,000/oz level, some investors chose to exit. Gold holdings with SPDR ETF fell by 12.55 tonnes to 1,082 tonnes, lowest since mid- March. Gold ETF flows may become more price sensitive, Rao observes. “We may see fresh buying in gold only when market focus shifts from central banks to economic risks.” However, this does not mean that gold has lost its own safe haven allure, experts insist.

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Factors supportive of gold prices continue to remain in play. Central banks continue to value gold’s utility in these uncertain times and thus added 84 tonnes to global official gold reserves during the first quarter. Analysts expect central banks to continue to diversify away from dollar assets into gold. Global growth worries have only intensified in recent weeks amid mixed economic data from major economies, downbeat growth forecasts, continuing Russia-Ukraine fighting and anaemic activity in China owing to virus related restrictions.

With so many moving parts, the likelihood of the US Fed achieving a soft landing for the economy is low, reckons Mehta. “A growth slowdown, high debt levels, and financial market instability will ensure that the Fed’s tightening is short-lived, making conditions conducive for gold again,” argues Mehta. He believes the US and other global central banks are staring at a policy error. Inflation may not come down even if interest rates are hiked as supply-side inflation persists and contributes equally. It is possible aggressive policy actions may kill inflation at the expense of growth. If central banks realise this and take a U-turn, it will lead to repricing in gold.

The yellow metal has already seen some respite as the strength in US dollar and US bond yields has started to moderate. Rao reckons gold may see some recovery soon as growth and inflation concerns increase its safe haven appeal. Experts maintain that investors should be guided by their asset allocation and keep up to 10-15% of their portfolio in gold. This can be built in a staggered manner via investments in gold ETFs or fresh tranches of Sovereign Gold Bonds.

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FAQs

What drives up the price of gold?

Today, the demand for gold, the amount of gold in the central bank reserves, the value of the U.S. dollar, and the desire to hold gold as a hedge against inflation and currency devaluation, all help drive the price of the precious metal.

What factors affect the gold prices?

What affects gold prices?
  • Demand and Supply: When there is a rise in demand for gold, the price increases, and vice versa. ...
  • Inflation: As gold prices react to inflation, Indians prefer to invest in gold. ...
  • Central Bank of India: ...
  • Interest rates: ...
  • Monsoon: ...
  • Import Duty: ...
  • Indian Jewellery market: ...
  • Government Reserves:

What causes the price of gold to fall?

When gold miners produce an excess of gold relative to demand, the price will experience downward pressure due to the laws of economics. Speculators that accumulate or let go of gold in the market can create temporary imbalances that lead to rapid price changes.

Does gold increase or decrease in the future?

If we look from year-to-date perspective, MCX gold rate has registered 11.70 per cent rise in 2022.

Will gold prices go up in 2021?

The World Bank predicts the price of gold to decrease to $1,740/oz in 2021 from an average of $1,775/oz in 2020. In the next 10 years, the gold price is expected to decrease to $1,400/oz by 2030.

Where are gold prices headed 2022?

He's reiterating his bullish gold trend view with a 2022 price target of $2,175, which is "modestly" higher than the current record high of $2,089.

Will gold price decrease in 2021?

New Delhi: Domestic gold prices are expected to surge towards the highs of Rs 52,000-53,000 over the next 12 months. In 2021, prices of the precious metal have been trading between Rs 47,000 and 49,000 mark per 10 grams. However, gold prices had seen a surge during 2019 52 per cent and 25 per cent in 2020.

Will gold rate decrease in coming days 2021?

Gold Rate Prediction for Next 6 Months

In this prediction you can see a gradual decrease in gold rate in coming days and average price for 10 gram 24 carat will close to 49060 INR.

Will gold price go down in 2022?

Gold Price Prediction 2022

BMO Capital Markets, UBS Global Wealth Management, and Reuters, all predict the gold price in 2022 will average between $1,700 - $1,800 per ounce maintaining the levels seen at the time of writing.

Is gold a good investment right now?

Gold has rallied to highest level since 2020 peak

Buying gold as an investment is typically considered to be a hedge against inflation as it retains its value while the buying power of fiat currencies erodes.

Should I buy gold now?

Investing in gold could be a good idea right now, but in our opinion it's never better than betting in stocks that exist as cousins to gold. Commodities aren't cash flow producing assets, and you can buy companies that mine gold for great earnings yields.

Will gold price go up tomorrow?

Gold Rate Forecast for Tomorrow is Rs. 4770 for 22 Carat & Rs.
...
Gold Rate Prediction or Forecast for Tomorrow.
Gold Rate Forecast for Tomorrow – 1 Gram Gold in INR
Date – 31st May 2022
Today's Close (Predicted)48055241
Change-35-38
Change%-0.729%-0.724%
4 more rows

What is the best time to buy gold in 2022?

The Most Auspicious Days to Buy Gold in 2022
  • Makar Sankranti – 14 January 2022. ...
  • Ugadi and Gudi Padwa – 2 April 2022. ...
  • Akshaya Tritiya – 2 May 2022. ...
  • Navratri – 26 September 2022 to 4 October 2022. ...
  • Dussehra – 5 October 2022. ...
  • Dhanteras – 23 October 2022. ...
  • Balipratipada – 26th October 2022.

Is It a Good time to Buy gold 2022?

US-based Citibank is bullish in its short-term outlook for the gold price in 2022. “Nominal gold prices may hold a high(er) range for the balance of 2022 as financial markets grapple with surging headline inflation, geopolitical uncertainty, and recession tail risks,” analysts wrote last week.

What will be the gold price in 2025?

Summary: What Is The Future Of The Gold
YearGold Price Prediction
2024$4,721
2024$4,988
2025$5,012
2030$8,732
3 more rows

Videos

1. Why You Should Buy Gold and Silver - Robert Kiyosaki
(The Rich Dad Channel)
2. WARNING! This Is About To Happen To Gold Price When The Gold Sell-Off Starts | Michael Pento
(Everything Entrepreneurship)
3. Peter Grandich: The Most Bullish Precious Metals Setup in my 38-Year Career
(Palisades Gold Radio)
4. Steve St. Angelo: Energy Crisis will Drive Gold to New Highs
(Palisades Gold Radio)
5. Gold as a Wealth Preservation Tool
(Fi Life)

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