So far, In 2022, Gold has rallied significantly. The rising safe-haven appeal of the yellow metal amidst the current geopolitical crisis is the primary driver behind recent gains. Markets fear that the ongoing Russia-Ukraine situation may worsen further.
Moreover, elevated inflation concerns have bolstered the yellow metal's appeal as an inflation hedge.
The risk factors at play have added sheen to the precious metal.
Ongoing risks boost safe-haven appeal:
Risk 1: Geopolitical uncertainty
With no end in sight, the ongoing Russia-Ukraine war has been a significant source of support for gold prices. As a result, gold prices, which had corrected 2.9% in 2021, are currently up nearly 8% on a year-to-date basis.
Gold prices hit an intraday high of $2,070.29 on March 8, 2022, close to the all-time high of $2,072.50 in August 2020. The momentum in Gold has fortified the status of Gold as a safe-haven asset during current tumultuous times.
Risk 2: Stagflation concerns
US Consumer price index (CPI) rose 8.5% in March, marking the highest since 1981. Surging food, energy, and shelter costs triggered a significant annual increase in the CPI numbers in March.Meanwhile, UK CPI rose 7% in March, marking a 30-year high. Surging energy prices spiked a 7% annual rise in the UK CPI numbers in March, the highest since March 1992 and exceeding the 6.2% increase recorded in February. The Russia- Ukraine war and the ensuing sanctions against Russia, the world's largest supplier of industrial metals, pushed up prices for various raw commodities. As a result, crude oil, natural gas, nickel, aluminum, wheat, and soybeans, among others, have all seen their prices reach record highs. This has been a significant reason why commodity trading is gaining prominence.
Risk 3: Recession fears
Inflation impedes consumer demand and has stoked recession fears on concerns of slower economic growth. This phenomenon has resulted in global growth getting revised downwards.
Furthermore, World Bank has lowered its global growth forecast from 4.1% to 3.2% due to the Russia-Ukraine war. The World Bank has attributed the slashed forecast to higher food and fuel costs on supply disruptions that consumers bear in developed economies.
International Monetary Fund (IMF) cut the global economic growth forecast and warned of higher inflation. As per the IMF, global growth is projected to slow down from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023.
Slower growth, recession fears could encourage investors to take solace in the safe-haven metal.
However, some factors point otherwise!
Will rising yields limit the upside in Gold?
Major central banks are turning hawkish to tame record high consumer inflation.
The US is aggressively pursuing rate hikes amid burgeoning inflation.In response, Federal Reserve Chair Jerome Powell has recently outlined his most aggressive approach to taming inflation. Speaking at a panel hosted by the IMF on April 21, Powell stated a 50-basis point increase was "on the table" for May and reiterated that Fed officials were committed to "front-end loading" inflation-fighting efforts.
Investors appear to be pricing in the possibility of a 0.50% increase in rate hikes at each of the following three meetings. The benchmark 10-year Treasury yields, as a result, bounced back towards the critical 3% level on the hawkish rhetoric, while the dollar rebounded from 1-week lows. This is curbing the appeal of the non-interest-bearing Gold.
So, how is Gold placed?
Gold price trend and forecast for 2022
There are three key factors inducing volatility and encouraging gold trading:
- Rising geopolitical uncertainty and recession fears
- Increasing central bank gold demand for asset diversification
- recovery in retail gold consumption across Asia
Goldman Sachs, a leading global investment management firm, has raised the 3-month gold price forecast to $2,300/oz from the prior figure of $1950.
The 6-month prediction has moved to $2,500/oz, from $2050/oz, and the 12-month horizon to $2,500/oz, from $2150/oz.
The rise in geopolitical uncertainty amid recession concerns could fuel tons of inflows into Gold ETFs. Additionally, increasing demand among consumers, investors, and central banks would act as a catalyst.
How to harness the volatility in Gold?
Investors looking for avenues to gain exposure to Gold generally can consider purchasing the physical asset, harnessing the volatility in the shares of gold-based stocks and exchange-traded funds (ETF) that mirror the price of Gold, or trading futures and options in the commodities market.
For stock investment enthusiasts, popular mining stocks to gain exposure in gold price volatility, include:
- Newmont Goldcorp Corporation [NEM]
- Barrick Gold Corp [GOLD]
- Kinross Gold Corp [KGC]
- Torex Gold Resources Inc [TXG.TO]
- Newcrest Mining [NCM.AX]
Popular Gold-ETFs include:
- SPDR Gold Trust [GLD]
- GraniteShares Gold Trust [BAR]
- ABberdeen Physical Gold Shares ETF [SGOL]
- SPDR Gold MiniShares Trust [GLDM]
- Goldman Sachs Physical Gold ETF [AAAU]
- iShares Gold Trust [IAU]
- iShares Gold Trust Micro [IAUM]
Although gold trading online appears alluring in current times, it must be noted that it carries significant risks. Also, CFD trading comes with leverage, which amplifies both losses and profits. Therefore, any beginner must look for authorized and regulated platforms and consider practicing on a demo account before trading with real money.
Gold prices to remain headline dependent
Volatility is likely to remain elevated as the metal's fate appears to be dependent on the Russia-Ukraine headlines and any changes in the monetary policy stance by the US Federal Reserve.
Investors will keenly watch Fed meeting outcomes, employment numbers, and consumer sentiment data for cues on the gold price movement.
It is best advised to have a financial investment consultant by your side and follow a planned strategy, in sync with your risk appetite and financial goals.
Disclaimer: Century Financial Consultancy LLC (“CFC”) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). Services offered by CFC include promotion and introduction of financial market products that are traded on margin and can result in losses that exceed deposits. Trading with leverage carries significant risk of losses and as such margin products may not be suitable for everyone; you should consider your investment objectives, risk tolerance and your level of experience with these products, and ensure that you understand the risks involved and seek independent advice from professionals/experts if necessary. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Refer to our risk disclosure.