In the investment world, gold is considered a haven asset. When things go wrong in the economy and in the markets, investors tend to flock to it, and with increased demand comes a rise in price.
This year is the exception, despite the risk of a recession in the world economy, high inflation and the new waves of COVID that continue to threaten the health of the population, the price of gold is at its lowest level since March of 2021.
Gold price in 2022
So far this year, the price of gold has fallen 6.5% and is around $1,700 per ounce.
The drop does not seem exaggerated when compared to the 17% that the S&P500, the main stock market index in the United States, has fallen in the same period. However, the decline is very similar if the maximum price reached in 2022 is taken into account: 2,050 dollars a ton in early March.
The level reached at that time was very close to its historical maximum recorded in mid-2020, after the scourge of COVID-19, but this time it was due to the war between Russia and Ukraine.
After Russia’s invasion of Ukraine, the world panicked: stock indices fell, raw materials too, as the two countries are key: both account for almost a third of world exports of wheat and 19% of corn . In addition, Russia is the second largest oil producer in the world and the largest gas exporter in Europe, it also produces around 6% of aluminum and 7% of nickel worldwide.
Gold was immune and once again established itself as a safe-haven asset, but why did it fail to hold that level? And why is it that it has fallen despite all the current uncertainty in the market?
Gold in the face of inflation and the rise of the dollar
Gold, like any other asset traded on the market, is susceptible to multiple factors. In recent months (perhaps) what has been moving the pulse of investors the most is inflation.
Globally, prices have spiked like not seen in decades: US inflation in June was 9.1%, the highest in 40 years; that of the euro zone was 8.6%, a record since the creation of the euro. And Mexico is not far behind, here inflation reached 7.99%, a maximum in 21 years.
To try to control inflation, central banks have decided to tighten their monetary policy by raising their key rates. This makes money more expensive, discourages consumption and investment, which reduces the demand for goods and services and, therefore, prices tend to fall. The problem? This policy slows economic growth.
With a global economic recession knocking at the door and inflation not giving up, investors have begun to bet on the dollar, also considered a safe haven, which in turn has been driven by an increase in demand for Treasury bonds, because with the rise in rates, these instruments become attractive.
The strengthening of the dollar and the rise in rates is what has hit gold in recent months. For one thing, a stronger dollar makes gold more expensive for holders of other currencies. On the other hand, the rise in the rate of the Federal Reserve of the United States makes gold less attractive, investors are going for Treasury bonds, also safe assets and that, now, are giving better yields.
Should you invest in gold?
Yes. Regardless of the moment the market is going through, specialists always recommend having a part of the portfolio invested in gold.
It is not just a matter of diversifying risks -which in itself is reason enough to invest in gold and other assets-, but of contemplating a long-term strategy.
In the last 20 years, the price of gold has risen by almost 500%, going from about $300 an ounce to about $1,700.
There are many ways to invest in gold, there are ways such as the purchase of jewelry, which in fact represents 42% of world demand, according to the World Gold Council, the acquisition of bars and coins, or financial instruments that are linked to this metal, such as ETFs (exchange traded funds).
