Four Key Factors affecting the gold prices in the coming year
Before the Covid-19 pandemic and the Ukraine war, gold was already on the rise, and today, gold shows its actual potential once again, thanks to a number of significant drivers that are currently in play.
The four main trends that point to a potential rise in gold prices in the coming year are as follows:
1- Gold usually performs well during stagflation
Fuel, energy, and commodity prices surged to record levels in the U.S. and Europe after Russia invaded Ukraine, which had an effect on consumer confidence and retail sales. Additionally, the ability of the economy to create goods and services at a given price is also being severely hampered by the Covid pandemic, which is further fueling inflation and stifling growth. Two warning indications that the situation is ripe for stagflation.
According to historical statistics, gold has significantly outperformed other asset classes during periods of stagflation.
In addition, there are a number of market-related elements that indicate gold may benefit from a fresh stagflationary phase. The justification is that, in contrast to riskier investments like stocks and cryptocurrencies, gold has resisted the financial market declines so far in 2022, repeatedly demonstrating its role as a hedge against inflation and market instability.
2- The overall demand for gold is growing
Investors rushed to the safety of gold, after the Covid-19 pandemic and Russia’s invasion of Ukraine, driving its price to new records. This increase in investors’ demand comes after an already strong year for physical gold purchasing.
Central banks have also been increasing their gold holdings as a hedge against growing geopolitical and economic problems, including inflation.
Central banks continued to be net buyers of gold in 2022, purchasing 19.4 tonnes in April, more than double the amount they did in the previous quarter.
Increase in investors’ interest in gold, push the gold price higher, as it happened in early February after Russia’s invasion of Ukraine, when gold prices nearly reached their highest level and gold resellers sold double or triple what they typically do.
Considering the negative economic effects of the Russia-Ukraine conflict and the ongoing high inflation rate, there is a strong likelihood that gold’s current momentum will continue.
3- Gold price and demand are driven by the geopolitical crises
The fear factor in times of war frequently pushes investors move their wealth from risky countries and assets and put it instead in gold as a long-term safe haven investment. The conflict in Ukraine has had a devastating impact on the global market, driving up the cost of commodities and energy, closing markets, and shifting funds, all of which have led investors to seek the protection of assets such as gold and precious metals. This created a boom for bullion dealers, with many of them witnessing a sharp increase in their usual sales levels, and with additional potential geopolitical trouble ahead (Russia-E.U/U.S., E.U-China, China-Taiwan) gold is likely to continue playing an important role.
4- Gold is challenging the traditional paper assets
Most financial assets are having their positions questioned and reassessed in individual and institutional portfolios, as a result of the ongoing crisis (Covid-19, the war in Ukraine, inflation, and recession).
While the majority of portfolios have been focusing on traditional “paper” assets such as stocks, bonds, currencies and new digital ones like cryptocurrencies and ETFs, a rebalancing seems to be in play towards commodities, energy, and tangible and protective assets like gold.
The trend among investors to move away from inflation- threatened currencies and volatile paper assets, towards more tangible ones that could serve as a hedge against inflation and economic turmoil risks, accelerates by rising inflation and the looming risk of stagflation.
These four key trends could mean one thing for the future of gold in the long-term: the precious metal is firmly placed in its rightful position as a tangible portfolio diversifier, inflation hedge, and store of value given the current market situation.
Finally, gold is becoming more popular as a savings alternative to traditional paper assets that have either been hit by market turbulences or have lost their purchasing power due to inflation and reckless money printing.
