The value of people’s savings and investments is currently going down as a result of the very high levels of inflation across the globe. In the United States, annual inflation reached 8.3% over the last 12 months in August 2022, according to the latest data from the Bureau of Labor Statistics.
Many investors, therefore, wonder if Gold can increase in value, as it is often considered as protection against inflation. After reaching an all-time high of more than $2,000 per ounce in March 2022, as a result of the war between Ukraine and Russia, Gold has been declining for the last several months, despite inflation reaching historic highs.
So, will Gold be able to go back up to $2,000? It’s hard to say, as there are many factors that need to be taken into consideration. In any case, if you want to take advantage of the ups and downs of the price of Gold, there are financial products that you can use, such as CFDs or Contract for Difference. If you’re looking to integrate CFD on Gold into your trading strategy, remember to always use a reliable broker that’s regulated in your region, such as easymarkets.com.
Why is Gold considered a safe haven against inflation?
Gold has historically been seen as a protection against inflation over time, making it the asset of choice for investors who want to preserve the purchasing power of their investments without taking unnecessary risk.
When inflation increases, but is still under control, central banks will not automatically vote to raise their main interest rates. This implies that the real interest rates (nominal rate minus inflation rate) on assets such as government bonds will be negative.
Gold’s tendency to move in the opposite direction of real interest rates makes it an effective hedge against inflation when interest rates are at low levels. This enables investors to prevent the value of their savings from falling excessively.
Why is Gold not increasing as inflation is hitting record-high levels in many economies?
So you might be wondering: why has the price of Gold been going down? Because everything depends on the big picture in which inflationary pressures are taking place and the way policymakers react, which mostly depends on whether the high inflation is a phenomenon that will pass quickly or whether it will persist for a longer period of time.
Since the goal of the central bankers is to maintain price stability in their respective economies, they have made the decision to tighten credit conditions since the beginning of the year in order to combat the high inflation, most notably by increasing interest rates and stopping their massive economic aid programs.
As a result, Gold has less appeal as interest rates continue to increase, as rate hikes influence both real interest rates and the demand for Gold.
The importance of the US Dollar in Gold’s weak price
It is important that the function played by the United States Dollar (USD) in the fluctuation of the price of Gold not be overlooked. Because the price of the yellow metal is measured in United States dollars, the value of these two assets is inversely proportional to one another, which means that they move in opposite directions.
This year, due to the steep increase in interest rates in the United States, the value of the greenback has skyrocketed versus its peers, hitting levels not seen in the previous 20 years. Because of this, the value of Gold is inevitably affected by the strength of the United States dollar.
Will Gold reach $2,000 again in 2022?
In spite of the recent drop in its price, Gold continues to be a desirable investment over the long term for a number of reasons, but it might be able to reach the $2,000 mark level if geopolitical tensions do not worsen, if the Fed’s policy keeps being aggressive, and if the greenback is still strong.
See what Money Girl, Laura Adams said about investing in gold on the Money Girl podcast in 2017. Listen below.