Anyone who has tried to predict the movement of the price of gold this year has had their work cut out for them, but that hasn’t stopped anyone from trying. Clearly, we are in an unprecedented market that has left most investors with too many questions when it comes to managing a portfolio during a recession.
2022 as an unusual year for gold so far
While no market environment offers a cookie-cutter display of what to do when certain things happen, this year has been particularly complicated. Essentially, a good course of action has been to do the opposite of what the common market indicators would tell you to do.
For example, lower stocks usually mean higher gold prices, but not this year. It seems investors just can’t sustain an investment. Even central banks aren’t particularly interested in gold now, although they usually buy the metal during periods of hyperinflation as a hedge to protect their country’s fiat currency.
However, in the case of the United States, it is important to note that almost 78% of its foreign exchange reserves were held in gold in February, making it the largest holder of gold among central banks in the world. As a result, the Federal Reserve may be reluctant to buy gold despite the troubling macroeconomic and geopolitical situation at the moment.
Investors are not interested in gold
The big problem for gold bugs right now is that investors just aren’t interested in gold. The World Gold Council reported that the yellow metal’s short-term momentum remained weak last month amid two-way stock market volatility.
The price of gold fell about 4% in May, erasing about half of the year-to-date rise it had seen through the end of April. The World Gold Council cited two reasons for the fall in the price of gold last month.
The first was weaker momentum due to outflows of 53 tonnes or approximately $3.1 billion from gold exchange-traded funds and the lowest level of net long positioning in COMEX futures. in one year. Absentee buyers and an antipathy towards bonds led to this weak long positioning in May despite the possibility that inflation could peak, according to the board.
The other reason for the decline in the price of gold was the reduction in risk and uncertainty, as illustrated by the decline in the implied 10-year forward equilibrium inflation rates. Moreover, stock prices recovered at the end of the month. However, despite this rally, the S&P 500 is still down about 14% year-to-date with very little change between the end of May and the end of the first week of June.
On the other hand, gold should have benefited from the volatility of the stock market, which reached levels not seen since the beginning of the pandemic. Most equity markets have been in correction or even bearish territory at some point this year. Bond yields and the US dollar also fell in May, which should have led to higher gold prices.
Despite the general weakness in the price of gold, there was a sign that individual investors were buying the yellow metal. Sales of easy-to-store gold coins have remained strong year-to-date. U.S. parts sales are on track this year to reach their highest level since 1999.
Where will the gold go next?
Gold’s current resistance level appears to be around $1,870 an ounce, where it has bounced at least twice in the past 30 days. On the other end, the price of gold appears to be stuck above $1,810 an ounce.
According to the World Gold Council, history suggests that gold will end the second quarter in the green, but given the unprecedented market environment we find ourselves in, I would say that is not a sure thing.
Most major equity indices are down more than 10% year-to-date, with equity volatility reaching multi-year highs and gold volatility moderating. The World Gold Council has noted that gold is a useful tail hedge but also works well during sustained stock market declines.
He looked at the 10 worst quarterly returns of the S&P 500 and the performance of gold during those quarters. The yellow metal posted positive returns in nine of the quarters with an average return of 5.4% against an average return of -20.7% for the S&P.
The current performance of the index puts it on track to be among the 20 worst quarters, but gold is down 5% for the second quarter. Due to the unprecedented state of the current market, it’s worth looking at the single quarter of the S&P 500’s worst 10 quarters in which gold fell to see what happened.
Remembering History: 4th Quarter 2008
The quarter in question was the fourth quarter of 2008, and gold was down 1.7%, while the S&P was down 25.6%. We actually see some similarities between then and now, with government stimulus being the most prominent.
In October 2008, Congress passed the bailout bill to support US banks, and the Labor Department reported that the economy had lost 159,000 jobs in September. The Fed extended further aid to banks by lending $540 billion to money market funds amid soaring redemptions. The Fed cut the federal funds rate to 1%.
In November, the Department of Labor reported that the economy had lost an additional 240,000 jobs in October. The AIG bailout grew to $150 billion, and the Bush administration began using part of the $700 billion bailout to buy preferred stock in the nation’s major banks. The Big Three automakers have asked for bailouts.
In December, the Fed cut the federal funds rate to 0%, the lowest level on record. Throughout the three months, the Dow Jones Industrial Average fell, ultimately ending the year down nearly 34% for the year.
This brief history lesson reveals a period of multiple government bailouts for multiple industries. Surprisingly, the dollar was strong in the second half of 2008, driven by the flight to safety of US Treasuries and the reversal of carry trades amid the crisis. Generally, when the dollar is strong, gold is weak, and this negative correlation certainly continued through the end of 2008.
Today, the dollar remains strong, although gold is holding up due to a combination of other factors in the market. However, given that we have arrived at the current environment following a series of government bailouts for industries and individuals, we cannot rule out the possibility of negative gold performance in the quarter. In progress. However, this does not necessarily mean that now is not a good time to hold gold.
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The World Gold Council has suggested that if stocks remain weak, gold could rebound. He also reassured investors worried about the yellow metal’s fall should stocks rally.
Looking over the past few weeks, the organization has found that in the few times the stock market has rallied, gold has also risen most of the time. The World Gold Council has also found that gold generally maintains positive performance during most long-term stock market rallies.
For example, he found that in the quarter following each of the S&P 500’s 10 worst quarterly performers, stocks rose an average of 8.7%, while gold rose an average of 2.5%. Even though gold has a negative second quarter, it is important to look at the long term when evaluating any investment. With the turmoil in the markets and economy today, it may be a good idea to hold some gold.
David Einhorn of Greenlight Capital touted gold in his presentation at the Sohn Investment Conference on Thursday, pointing to the country’s high debt levels and the lack of trust other countries now have in the United States since they weaponized the dollar. Einhorn thinks it’s time to hold gold, and it seems likely that a growing number of long-term investors will be willing to accept.
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