- Gold is traditionally seen as a hedge against inflation and a safe haven in times of economic uncertainty.
- But despite high inflation and growing fears of a recession, gold has fallen 15% since early March and 5% since the start of the year.
- Meanwhile, the US dollar index has jumped 9% since March and 11% since the start of the year.
Gold has slumped this year – even as economic conditions favor the asset’s boom – and is significantly underperforming the US dollar.
The precious metal has traditionally been seen as a hedge against inflation and a safe haven in times of economic uncertainty.
But despite high inflation and growing fears of a recession, gold has fallen 15% since peaking above $2,000 an ounce in early March and is down 5% since the start of March. the year. Meanwhile, the US dollar index has jumped 9% since the start of March and 11% since the start of the year.
This creates a “moment of truth” for gold, according to OANDA senior market analyst Jeffrey Halley, writing in a recent note to investors that gold has been unable to take advantage of the recent pullback in the dollar last week.
“To say gold’s price action is disappointing is an understatement, and it appears to face imminent material downside risks if the technical chart is to be believed,” he wrote.
With inflation hitting a 41-year high of 9.1% yoy, 2022 should theoretically be gold’s time to shine. And Wall Street is increasingly sounding the alarm that the US economy will slide into recession this year or next. But on Thursday, gold hit a 16-month low of $1,680 an ounce.
Meanwhile, the dollar is near 20-year highs, benefiting from a Federal Reserve aggressively raising benchmark rates. Since March, the central bank has made progressively steeper rate hikes of 25, 50 and 75 basis points. After the close of its next meeting on Wednesday, analysts expect a further increase of 75 points or even 100 points.
In fact, rates are a key driver of gold prices because the metal offers no yield, which means gold is generally negatively correlated to the dollar, according to UBS commodities analyst Giovanni Staunovo. .
In certain circumstances, such as in times of high fear and volatility, the demand for safe assets jumps. And that’s when the correlation between gold and the dollar becomes positive, which happened during the 2008 financial crisis, he added.
The dominance of the dollar as the currency of choice for fixing commodity prices acts as another drag on gold. When the dollar is strong, it tends to put downward pressure on gold prices.
With observed trends continuing, the outlook for gold is bleak.
“While choppy equity markets and market uncertainty helped gold earlier this year, rising US real rates were the main driver weighing on gold prices,” Staunovo said via email. mail. “As we see inflation stabilizing from very high levels and the Fed tightening monetary policy, we expect outflows from elevated ETFs to weigh on gold prices.”