Why is gold generally considered a good inflationary hedge? Gold is a valuable resource with many benefits that make it an ideal investment. These benefits include its scarcity, durability, portability, divisibility, and liquidity.
Gold prices are not moving up as most investors would expect even amid globally rising inflation. Traditionally, gold was one of the best hedges against inflation. However, in the current global economic conditions, gold prices seem to be trending in a tight range even when inflation is on the rise at unprecedented pace. The last few days, the price of spot gold ranges roughly between a low of $1830 and a high of $1870 per troy ounce.
The aim of a hedge-asset is to protect finances from risky situations. The higher the risk of loss, the greater the importance of protection against it. However, rarely does a hedge investment completely eliminate the potential for losses.
Some very good reasons that can explain the current stagnancy of the gold include the stronger dollar and U.S. Treasury yields alongside a global inflation surge expectation that could lead to more aggressive monetary policy measures. According to a CNBC’s article rising real yields in the United States and continental Europe and a firm dollar are negative factors for gold at this particular moment. Higher U.S. interest rates increase the opportunity cost of holding gold. At the same time, the ECB is under pressure to end its ultra-looser monetary policy and is expected to raise interest rates.
There is a clear positioning from the US Fed that the rate hikes will continue until inflation is under control. The rising rates will make it more attractive for investors to stay in the currency and earn the higher currency yield. This has also led to a strengthening US currency. Hence, gold being quoted in US Dollars, the price is expected to come down.
Another view however is that gold is having a decent year, if only by not losing. Year-to-date returns show gold as one of the few asset classes in positive territory, even with a modest 2% return. Gold’s gains may be small, but they’re far better than double-digit losses in equities, credit, and U.S. Treasuries.
Blackrock analysts suggest that going forward, gold’s efficiency as a hedge will be guided by the market’s largest headwind. To the extent volatility remains mostly a function of central bank tightening, gold may continue to struggle as monetary conditions normalize. However, if attention re-focuses on the war in Europe and all the impossible to quantify outcomes, gold will probably hold up relatively well amidst the chaos.
t2conline.com, financialexpress.com, economictimes.indiatimes.com, cnbc.com, seekingalpha.com, blackrock.com .
*Disclaimer: The information contained in this publication does not constitute investment advice and is not a personal recommendation from NaxexInvest. Nothing contained herein constitutes the solicitation of the purchase or sale of type of financial instrument. Any investment activities undertaken using this information will be at the sole risk of the relevant investor. NaxexInvest expressly disclaims all liability for the use or interpretation (whether by visitor or by others) of information contained herein. Decisions based on this information are the sole responsibility of the relevant investor. Any visitor to this page agrees to hold NaxexInvest and its affiliates and licensors harmless against any claims for damages arising from any decisions that the visitor makes based on such information.