Inflation is rampant globally and war has arrived back in Europe but the gold price has fallen back from a high point just after Russia's invasion of Ukraine of over $2,000 (£1,630) an ounce, and is sitting on year-to-date gains of just 2 per cent.
Professional investors have gone off gold recently, with leveraged funds dropping long positions as per the most recent Commitment of Traders report from the US Commodity Futures Trading Commission. ETF buying has also turned into selling in recent weeks.
Gold has traditionally performed well as inflation eats away at the value of cash holdings, leading to forecasts this year of prices climbing given the continued pricing pressure globally. Gold climbed back over $2,000 an ounce in the first week of March but has since come back to around $1,820 an ounce.
Ross Norman at Metals Daily said gold’s recent performance was “deeply lacklustre”, even with the backdrop of other assets falling off much more significantly. “The only good news for gold is that bitcoin is looking worse,” he added. Norman did point out better performance in non-US dollar terms.
The metal’s place as a safehaven asset looks secure, however, given the massive selloffs in equities, bonds, and even bitcoin, which some had held up as a replacement investment for gold in troubled times.
“Gold is your friend during inflationary times,” said George Milling Stanley, chief gold strategist at State Street. He added that in previous years where inflation was over 5 per cent “in a sustained manner” in the US, equities had dropped 1 per cent, US treasuries 2.4 per cent, and gold increased 12 per cent.
Stanley said only “upward momentum” was missing, although he acknowledged the metal’s performance in 2019 and 2020 - which saw 18 per cent and 24 price appreciation respectively - was unlikely to be repeated.
Investors have shown some enthusiasm for gold lately – illustrated by the 10.2mn ounces, worth $18bn, in net inflows into gold-backed ETFs in the year to 9 May, as per World Gold Council (WGC) data, but the price has not responded accordingly.
While not fully driven by supply and demand like an industrial metal such as copper, some demand aspects can impact the price - both investment demand and physical demand through jewellery sales in key markets China and India.
WGC senior markets analyst Louise Street said gold was caught between high inflation and rising interest rates, a “push and pull” scenario. “Neither [factor] is winning out,” she said.
She added that the WGC saw the macroeconomic outlook in a binary fashion, with either peace in Ukraine and slowing inflation or current problems persisting. In theory, the latter situation should support the gold price more than the former.
Stanley at State Street said gold should play a home insurance-like role in portfolios, where the time to buy was before the house is destroyed. “Every portfolio could use some gold,” he said.
How about bitcoin as an inflation hedge? Read our companion piece here
