Gold Market Outlook
The speed at which central banks around the world tighten monetary policy in a bid to reduce inflation will probably continue to influence how responsive gold is to real rates in the near term. The rate of inflation is still very high. The difficult environment will affect consumer demand for gold for the remainder of the year.
Balancing political unpredictability, rate increases, and inflation
The upcoming months seem to will be difficult for investors to handle due to rising interest rates, soaring inflation, and returning geopolitical issues. In the foreseeable future, political unpredictability, the rate at which international central banks tighten monetary policy in a bid to contain inflation, and gold prices will probably continue to be sensitive to real rates.
- Rate increases could affect gold, but many of these hawkish policy assumptions are already factored into the market;
- Meanwhile, ongoing geopolitical threats and inflationary pressures are anticipated to keep demand for gold as a hedge;
- Gold may benefit from the underperformance of stocks and bonds in a future uncertain environment.
Inflation risks are outweighed by higher rates
Investors sought high-quality, liquid hedging amid rising geopolitical unpredictability as the gold price originally surged. But as investors' attention went to monetary policy and increased bond yields, gold lost some of those early gains. In reaction to the struggle between rising interest rates and a risky environment, the price of gold stabilized. The latter was a result of a combination of factors, including stubbornly high inflation as well as probable support from ongoing tensions and potential spillover effects on global growth.
Rising opportunity costs, brought on by higher rates and a stronger currency, were a major drag on gold's performance year to date, but rising risks, brought on by inflation and geopolitics, drove gold higher most of the time.
Notably, while the strengthening of the US dollar relative to a wide range of currencies has hampered the price of gold (when expressed in US dollars), it has supported the performance of gold in many other currencies, including the euro, yen, and pound sterling, among others.
Additionally, even if gold's year-to-date performance has been flat, it has long been among the best-performing assets. It did not only generate profits, but it did it with volatility that was below average. As a result, during this uncertain time, gold has actively assisted investors in limiting losses, especially because during the era, both stocks and bonds, which typically make up the majority of investors' portfolios, showed negative returns.
During the last quarter, investors are expected to continue to encounter significant challenges. As a result, they will have to weigh a number of competing risks that are further complicated by some degree of uncertainty regarding their magnitude.
Uncertainty in monetary policy is expected to increase volatility
Financial markets, especially the gold market, were significantly impacted by monetary policy rates. The performance of the gold price has traditionally been significantly influenced by investor expectations of future monetary policy actions, as indicated through bond yields, according to data. According to historical data, gold has historically underperformed in the months before a Fed tightening cycle, but has dramatically outperformed in the months after the first rate hike.
In periods of high inflation, gold has typically performed well. Gold's price rose 14% on average in years with inflation above 3%, and nearly 25% on average in years with US CPI averages over 5% on a year-over-year basis, now at 8%. Additionally, during times of rising inflation, gold has outperformed other commodities.
Real rates are likely to stay low despite competing influences
Despite upcoming rate increases by a number of central banks, nominal rates will continue to be historically low.
This is significant for gold because real rates, which combine "opportunity cost" and "risk and uncertainty," two key factors that influence gold performance, frequently tend to affect gold's short- and medium-term performance.
The economy's deteriorating state, persistently high inflation, and simmering geopolitical tensions all portend further stock market falls. The possibility of stagflation has also significantly increased. Our data also show that gold has performed well overall and particularly well during uncertain times, despite its tendency to underperform during reflationary periods.