Gold’s Safe-Haven Status Under Question After Disappointing Price Performance YTD

Gold’s Safe-Haven Status Under Question After Disappointing Price Performance YTD

Despite its popularity as a solid precious metal, gold’s overall price performance in 2022 failed to meet broader expectations. The war in Ukraine, co

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Despite its popularity as a solid precious metal, gold’s overall price performance in 2022 failed to meet broader expectations. The war in Ukraine, combined with fears of inflation already being felt from early on this year, tilted the consensus in favour of gold, and the projection was that the precious metal would continue to move up.

That did not materialize, though, and despite the fact that gold price recently surged to a one-month high, it trades well below the all-time high. Several factors have contributed to this development, in particular the rise of the US Dollar, which is inversely correlated with the price of gold. Rising Treasury yields, which have historically been a forecast for gold underperforming other asset classes, are also worth mentioning.

Gold down YTD

Looking at the price of gold, it is obvious that this precious metal erased all gains generated during the first three months of 2022 by now. It’s currently trading below $1,800 per ounce, approximately 4% below the January 3rd open. True, a spike in gold price occurred once the war started, however since then the market reversed course and the focus turned to other commodities such as crude oil or natural gas.

Another headwind for gold is Treasury yields. The gold price in USD tends to fall when US government borrowing costs rise. Analysts at easyMarkets also point out that tighter monetary conditions at the Federal Reserve pushed the US Dollar Index to levels not seen since the early 2000s, which definitely does not favour a consistent rise in dollar-denominated assets (such as gold).

Price is pressuring the 2011 high

People may argue that gold’s safe-haven status has weakened, especially given the underperformance seen this year. However, on larger time frames, the price still leans towards the upside. Technically, it managed to break above $1,900, which was the prior all-time high set in 2011, and since then has been consolidating in a range between $1,700 and $,2000.

Failure from sellers to push the price of gold significantly lower suggests that the long-term upside potential is still in place, and might eventually materialize once the headwinds previously mentioned start to weaken.

Technical analysts believe that if gold rises above $1,900 and manages to stay there without dipping impulsively, that can be an early sign of a continuation that may even extend towards $2,000 and then $2,500, over the upcoming months or years.

Inflation, yields, and risk appetite

Investors with a long track record continue to allocate a portion of their portfolio to gold, despite the fact that other assets such as stocks or cryptocurrencies have posted larger returns over the past decade. Perhaps that is because “new age” traders are attracted by the volatility of these markets, and view gold performance as weak.

In reality, gold has a more stable performance, which is why it’s still viewed as a store hold of value. In the short run, the price of gold can be impacted by factors such as inflation, yields, and the broad risk appetite, leading to temporary underperformance, like the one witnessed now.

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