Gold is the preferred choice of many investors experiencing market volatility. The reason is Gold prices generally increases when the overall market flounders. For example, between 2008 and 2011, Gold’s price increased more than 100% as the economy battled through the Global Financial Crisis (GFC) and transitioned into recovery.
Gold prices: pre-war
Before Russia’s invasion, Gold and its miners had been among the best-performing assets in 2022.
That performance has continued following the invasion as investors seek safe-haven assets. In addition, Russia is a significant producer of Gold, so its expulsion from global economic trade is expected to reduce the precious metal supply.
Accordingly, the fears of supply shortages due to the Russian-Ukrainian conflict and strong demand have driven gold prices higher. A beneficiary of the rise of the gold price has been its miners and of course investors.
Gold prices: Russia-Ukraine war
Gold surpassed $2,000 an ounce after the US said it might ban Russian oil exports in retaliation for President Vladimir Putin’s invasion of Ukraine, raising concern about higher inflation and slowing economic growth.
- Since Russia invaded Ukraine, global equities have been sold-off as investors seek safe-haven assets.
- The price of Gold is up 9% so far this year, its miners over 19% (to 10 March 2022, source Morningstar).
- When governments take up arms, the price of yellow metal usually rises. But unfortunately, heavy artillery attacks close to nuclear power plants also do not help this time.
Besides, sanctions on Russia, a significant producer of Gold, are expected to reduce the supply.
Bullion extended its most significant weekly advance since July 2020 after US Secretary of State Antony Blinken stated recently that America and its allies are discussing an embargo of Russian oil. That could appreciably reduce expectations for the Federal Reserve to contentiously hike interest rates this year to manage what is already the highest inflation in 40 years.
Against an environment of heightened uncertainty regarding the impact of the continuing conflict on commodity prices and amid ongoing supply chain disruptions, market-based measures of inflation expectations hint at inflation higher for longer.
Gold prices: the near future
By the end of this year and early 2023, Fitch predicts growth to be more similiar to the pre-pandemic trend because economies will have redeemed most of the output lost during the crisis.
However, some uncertainty is predicted to persist as long as the pandemic still exists, promoting Gold.
The 2023 gold price prediction has also been amended from $1650/oz to $1800/oz. Beyond 2022-2023, Fitch anticipates gold prices to remain on an easing track, reducing Gold holdings as risk-on sentiment returns.
Furthermore, as most of the global population will be vaccinated against COVID-19 and countries move more firmly to a new normal beyond 2022, risk-on sentiment should also increase in tandem, reducing the appeal of Gold.
Despite Fitch’s outlook for gold prices to weaken, the company does not see a return to pre-COVID-19 levels, with prices predicted to ease to $US1600/oz in 2026, compared to $US1393/oz in 2019.
Weak gold prices before 2019 drove gold miners to cut costs and improve efficiency in existing projects.
Gold prices: yin to stock market’s yang
Gold is inclined to be resilient during stock market crashes because gold and the market are negatively correlated. That is to say, when one goes up, the other tends to go down.
When you unpack the concept, it makes sense. Stocks improve from economic growth and stability, while gold improves from economic distress and crisis. If the stock market declines, fear is usually high, and investors typically seek out the haven of Gold. Conversely, if stocks are rockin’ and rollin’, the perceived need for Gold from mainstream investors is low.
On average, when the stock market crashes, Gold has historically risen more than declined. Gold has also outperformed cash sitting in the bank account or a money market fund. Even real estate values act in accordance with Gold only a little more than half the time.
The practical conclusion for investors:
- If you want an asset that will increase when most other assets decrease, Gold is likely to do that more often than not.
It doesn’t mean Gold will automatically rise with every downtick in the stock market. History demonstrates that Gold is more likely to be sought as a haven in the most prominent crashes. So if you predict the economy is to be strong, you may want to own less gold. If you expect the economy is headed for weakness, you may want to own more Gold. If you believe the economy is approaching a period of upheaval, you may want to own a lot.
Gold equities vs gold bullion
Gold bullion is gold in its corporeal form; gold bars and coins are the most popular options for bullion. Many committed gold investors believe the sole way to own gold is to own bullion. Touching and seeing the precious metal elicits an emotional aspect in some investors. Although, investing in gold bullion has additional costs. Dealers often charge premiums higher than the current spot price or the published price of Gold. Also, Gold bullion must be stored somewhere safe and be insured and protected against loss.
Many experienced investors prefer gold stocks to bullion. Even investing icon Warren Buffett identifies that “bullion produces no income.” On the other hand, investing in gold miners and dealers offers potential corporate profit opportunities. Still, the bullion price strongly influences the value of a miner’s or gold trader’s business; therefore, stock prices increase and decrease. Historically, solid gold mining and selling companies have produced more profitability than bullion over the long term.
Advantages and disadvantages
Gold bullion is regarded as a safe investment choice, as demand for gold is often solid, mainly when the stock or bond market is descending. As governments print more money, the security of gold bullion nourishes increased demand. Increasing demand from Asia and other emerging world powers has fuelled gold bullion prices in the past few decades. Gold stocks can generate large profits if the companies are intelligent, productive and well-managed. When gold bullion prices increase, gold mining companies and their stock prices typically follow.
Buyers must be purchase Gold bullion from dealers, who often add premiums to their prices. In addition, it must be stored, secured and insured, generating additional costs. As gold bullion is a commodity, its value is a rarity, with prices fluctuating according to supply and demand rules. The mining companies supporting gold stocks also have operating costs for staff, equipment and all phases involved in finding, extracting and transporting Gold. Should these operating costs rise, such as the cost of fuel, the companies’ profitability declines, as does any corporation facing such increases. Company stock values depend on their profitability and projections of future successes.
Gold prices: strategy
Anything can ensue when markets are hit with extraordinary volatility. Yet, regardless of what stocks might do, is it wise to be without a meaningful amount of physical Gold and silver in the light of all the risks we face today?
Perhaps the ideal resolution is to have a reserve of cash ready to deploy if we get another significant decline in precious metals — but also have a reserve of bullion set aside in case the next crisis sends Gold to rapid ascension.
Vogue Advisory Group – helping you understand Gold and the market
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