Gold, the world’s leading haven asset, plunged with global uncertainty as investors continued to accumulate Dollars ahead of the inevitable recession.
In a recession, cash is the king. Hence, while global investors prefer to save in dollars, especially with borrowing costs on the rise and the Federal Open Market Committee (FOMC) expected to raise interest rates by another 50% to 75% basis points in the month of July.
The U.S Dollar rose to a 20-year high this week and is expected to continue in the near term as I do not see demand for the greenback abating anytime soon given the severity of global risks and uncertainty.
The price of gold dropped from $1814.19 per ounce it peaked on Monday to $1732.14 on Wednesday before slightly paring losses to $1743.74 at 10:36 am Nigerian time on Thursday.
“Gold’s price reaction has been rather muted as it had already started to price in a rising probability of another sharp rate hike in July,” said Suki Cooper, an analyst with Standard Chartered.
“In recent sessions, gold has succumbed to the risk-off sentiment as the dollar has benefited.” Risk-off is when traders and investors reduce their exposure to risk and concentrate on protecting their capital.
According to Tai Wong, an independent metals trader based in New York, rising interest rates means holding the dollar at no additional interest rate is better.
He said, “The hawkish Fed minutes which suggested an ‘even more restrictive stance’ provided no relief for metals markets.”
“While a short-covering rally is possible if payrolls are soft, a lasting upturn (for gold) will require a softer U.S. CPI reading next week. That’s needed to pull the Fed back from launching another massive tightening volley,” Wong added.
Price of Gold Rises Above $2000 as Ukraine War Continues
A report by Mining Weekly reveals that the price of gold scaled the $2000-level for the first time in over a year on Monday, 7th March. This update is coming up in the wake of the Russia-Ukraine crisis.
According to the report, Spot gold has moved up 0.9% at $1 986.83 per ounce after scaling to its highest since August 19, 2020 at $2 000.69 earlier in the day. Also, the report reveals that US gold futures rose 1.3% to $1 992.00.
Speaking about the rise in price, currency strategist at DailyFX said: “If this was risk aversion driven by the US Federal Reserve as seen ahead of this war, that wasn’t something that lifted gold as that risk aversion was about rising rates, which is not an environment in which gold does well. This risk aversion, however, is geopolitical, and so there seems to be a reflective demand for non-paper assets.”
The effects of the war have been felt for over two weeks with many trading commodities affected the most starting with the price of oil.
The fighting has affected so many people with reports showing how people are struggling to evacuate many besieged Ukrainian cities.
Russian President Vladimir Putin has also vowed to press ahead with his invasion unless Kyiv surrendered. However, reacting to Vladimir’s invasion are sanctions that have been served Russia from the international communities – sanctions that are also affecting the market one way or another.
Reports also reveal that holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, rose 0.4% to 1054.3 tonnes on Friday, 4th March – the highest recorded since mid-March 2021.
Experts also project that Spot gold may keep rising towards $2065 per ounce. Palladium has also risen up 4.3% at $3 130.16 per ounce, after hitting an all-time high of $3 172.22 earlier within this period.
It is also interesting to note that Russia accounts for 40% of the global production of auto-catalyst metal. A metal used by automakers in catalytic converters to curb emissions.
Speaking on the sanctions and how they may affect the world, Spivak said: “We’re looking at a very significant pick-up in concerns around the disruptions with Ukraine seemingly because the conflict is showing signs of broadening.”
Gold’s 10-Year Return Less than 2%; Global Demand for Investment Gold Plunged by 60% YoY
During times of risk and market volatility, investors look for high-quality assets that can save their capital and minimize losses. History has shown many times that gold works as a good store of value in such times of uncertainty. However, the 10-year return for gold investments plunged deep below investors’ expectations.
According to data presented by BlockArabia, after turning negative in August, gold’s 10-year return rose to just under 2% this week.
A Sharp fall After Fantastic Return Rates in 2019 and 2020
For the last 50 years, gold has been the perfect stock market hedge, with its most impressive performance in the 1970s and 2000s. From 2000 to 2009, during the worst decade for the S&P 500 after the 1930s, the S&P 500’s annual return was just over 1%. At the same time, the gold investment return amounted to 18% per year throughout the entire decade.
According to St. Louis Fed data, positive returns on gold investments continued in most years during the next decade. In 2002, gold’s annual investment return hit 25.6%. Five years later, this figure jumped to almost 32%. After fantastic 2009 and 2010, the following years witnessed a negative trend, with the annual investment return for the precious metal reaching the deepest point of -27% in 2013.
Four years later, in 2017, the annual investment return recovered to 12.7%. Finally, in 2020, gold became an asset with the second-highest yearly investment return behind silver, bringing an average return of almost 25% that year, much more US stocks and corporate bonds or EAFE stocks.
However, statistics show that 2021 witnessed a sharp fall, with gold’s YTD investment return plunging to -7.37%.
Although 3-year and 5-year investment returns for the precious metal remained high, amounting to 46% and 31% as of this week, respectively, the 10-year return dropped significantly over the last two months. On August 10, it amounted to -6.56% and then slipped to -7.54% in the first days of September. Statistics show this figure manager to recover a bit a hit 1.97% on October 4th.
Global Demand for Investment Gold Plunged by 60% YoY
Investors see gold as a ‘safe haven’ in times of market volatility, just like those triggered by the COVID-19. That is why global demand for investment gold surged to all-time highs last year.
In 2019, before the COVID-19 hit, the global demand for investment gold amounted to an average of 300 metric tons per quarter. By the end of March 2020, this figure jumped by 93% to 556 metric tons. The increasing trend continued in the second quarter of the year, with global demand for investment gold hitting over 584 metric tons, almost double the amount in the same quarter a year before that.
The World Gold Council data show the global demand for gold for investment purposes hit a record-breaking 1,140 metric tons in the first half of 2020, the highest figure so far.
However, the following months have witnessed a noticeable downsizing trend, with the figure falling to 138 metric tons in Q4 2020. Although global demand for investment gold recovered and hit 465.2 metric tons in the first half of 2021, that is still 60% less than in the same period a year ago.
Gold Prices Rise as Soft Dollar Supports Safe-haven Appeal
Gold prices firmed on Monday, propped up by a subdued dollar and slight retreat in the U.S. Treasury yields, with investors gearing up for a week of speeches from U.S. Federal Reserve policymakers for cues on the central bank’s rate hike path.
Spot gold was up 0.5% at $1,759.06 per ounce, as of 0400 GMT, while U.S. gold futures were up 0.4% at $1,759.00.
While the dollar index softened, the benchmark 10-year Treasury yields eased after hitting their highest since early-July. A weaker dollar offered support to gold prices, making bullion cheaper for holders of other currencies.
“Gold is still looking slightly precarious where it is right now, and it’s probably bouncing off key technical level around $1,750,” IG Market analyst Kyle Rodda said.
“Gold remains an yield story and that yield story is very much tied back to the tapering story.”
A slew of Fed officials are due to speak this week including Chairman Jerome Powell, who will testify this week before Congress on the central bank’s policy response to the pandemic.
“There’ll be a lot of questions being put to Fed speakers about what the dot plots implied last week and weather there is higher risk of heightened inflation going forward and that rate hikes could be coming in the first half of 2022,” Rodda added.
A pair of Federal Reserve policymakers said on Friday they felt the U.S. economy is already in good enough shape for the central bank to begin to withdraw support for the economy.
Gold is often considered a hedge against higher inflation, but a Fed rate hike would increase the opportunity cost of holding gold, which pays no interest.
Investors also kept a close watch on developments in debt-laden property giant China Evergrande saga as the firm missed a payment on offshore bonds last week, with further payment due this week.
Holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, increased 0.1% to 993.52 tonnes on Friday from 992.65 tonnes in the prior session.
Silver rose 0.9% to $22.61 per ounce.
Platinum climbed 1.3% to $994.91, while palladium gained 0.7% to $1,985.32.
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