With gold’s long history as a stable store of value, it has traditionally been used by a lot of people to guard against currency fluctuations, stock volatility, and financial risks. But with prices treading water in the past couple of years as other asset classes like cryptocurrencies; have appreciated immensely, a lot of investors are wondering whether it is still worthy of a place in their financial portfolios.
This metal’s recent underperformance has been decided by some factors, including possible changes in interest rates, rampant inflation, and central bank activities, all of which are slowing confidence in this safe-harbor and long-standing asset. Given that its price has lagged in recent years, is it not a good purchasing opportunity for this metal, or should people hold off on purchasing gold? Here is what people should know:
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Gold price as of 2021
Usually, people tend to lean toward inflation-protection properties during economic times when the prices of services and goods are going up. With that being said, demands for this element have weakened. According to experts, the demand for this precious metal fell 7% in the third quarter, as well as the year-to-date need for this element is down more than nine percent.
The price of this asset is around $1,900 an ounce, which is down more or less 5% this year, but it was up significantly from prices three or five years ago. Even though the price appears to be slowing down, it is traditionally high. It reached a record-high $2,000 in 2020 and ever since has pulled back around 10%. A lot of investors have looked at this element in the last couple of months and are wondering why it is not going up in the short term if the country’s inflation is rising.
Factors affecting gold prices
The answer stems from the monetary expansion and stimulus pumping markets with billions, even trillions of dollars, crushing fear, as well as causing risk assets to go up, like stocks, cryptocurrencies, real estate, and junk bonds. Because of this, people are willing to take on risks to cover for financial inflation.
As the price of this element has slowed down, they have been turning to other assets such as equities for substantial yield. Another factor in the cost of this element is the rise of online currencies or cryptocurrencies, which could be consuming the metal’s market share. Many of these weakening demands are exhibited by gold ETF (Exchange-Traded Fund) outflows.
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There is a good chance that this trend will continue in the year’s third quarter. There are ongoing debates in investing communities whether online currencies could function in the same way as this element’s traditional role. Even though cryptocurrencies’ value is far from secured and stable, some people view these things as related to this thing because of the currency’s fixed performance and supply potential. But this element has tested the assets, while cryptocurrencies are emerging assets, which add to people’s risks.
Is this precious metal a good safety net for inflation?
Individuals who invest in gold have historically seen it as a safety net asset that protects buying power against inflation during hard economic times since it holds its value over time despite fluctuations. Even though there’s a correlation between inflation and price, that relationship could disintegrate in the short term because of multiple factors like the United States dollar volatility, bond yields, and other risk factors that have a considerable impact on this element than inflation.
But it is more likely to regain its inflation- safety net status as the current inflationary time continues. According to data, the relationship between the two usually improves during times with high inflation, as fears of value loss can bring more investments in safe havens, including precious metals. As inflation have been slowly recovering recently, the link between the two is likely to recover in the next couple of years.
The future of gold
A huge factor that can affect the future of prices is the path the government or Federal Reserve takes with financial policy. This year, the Federal government is expected to start raising interest rates, a less positive scenario for this metal.
It is because when rates increase, the cost of these investments also increases since it is an asset that does not pay out interest or dividends. In rising-rate environments, this thing may not be pretty appealing as an asset for people to hold in their financial portfolios, which will considerably impact future gold investor holdings and put downward pressure on gold prices.