With the uncertainties associated with persistent and rampant inflation, many investors might have thought that the gold market would see a rising price. However, this is not the case. Quite the opposite, in fact, as the ounce of gold is trading at its lowest levels in two years, at $1,671.75 on 30 September. Since its last peak in March at $1,998.90, the ounce of gold has now fallen by around 20%.
If gold is truly heading into a bear market, the strength of the dollar is a factor. With the US Dollar Index (DXY)--measuring the value of the dollar against a basket of six foreign currencies--at its highest levels in 20 years, the greenback’s dominance has affected investor sentiment across commodities.
10-year bonds
Gold has also suffered from 10-year US bond yields, which are currently showing some resurgence. The rising yield environment is not causing investors to pull back into gold. This is in addition to the fact that higher US bond yields increase the opportunity cost of holding gold.
Another factor pushing the gold market down is that central banks keep increasing their gold reserves. Central banks are turning to gold as a store of value in times of economic and geopolitical uncertainty. ING analysts noted that some central banks may also have been concerned about the freezing of foreign exchange reserves by the Russian central bank in the wake of its invasion of Ukraine. Central banks have thus sought to diversify their reserves into gold.
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A price determined by flows
Data from the World Gold Council show that total central bank holdings were replenished by around 180 tonnes of gold in the second quarter of this year. In July alone, central banks accumulated 37 tonnes of gold. This trend is unlikely to be reversed due to macroeconomic instability and the ever more uncertain outcome of the war in Ukraine.
Demand for gold therefore remains strong, but the price is determined by investment flows. And expectations are less optimistic in this regard. The US Federal Reserve’s monetary tightening is expected to continue, further strengthening the dollar and the US bond yield environment.
If the Fed’s rate hike remains the central element, the gold price could therefore rise when inflation shows its first signs of decline. This is not expected before the second half of 2023.
Read the original French version of this analysis article on the site. This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. .