Apr 26, 2022
What is Gold?
Gold is a chemical element with the symbol Au and atomic number 79, making it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile metal in a pure form. Chemically, gold is a transition metal. It is one of the least reactive chemical elements and is solid under standard conditions. (1) Some of the more interesting properties of gold include (2):
- It is very rare
- It will not rust and is non toxic
- It is one of the most beautiful metals
- It is easy to work with and extremely malleable
- It has a high electrical conductivity
What is Gold Used For?
Gold wide range of applications. Many people will be familiar with its use in jewelry, and coins, but its industrial uses are numerous and also important for generating demand for gold globally (2, including the image above).
- Wealth protection and a financial exchange
- Decoration, jewelry, and medals
- Space exploration
- Medicine and dentistry
Price Performance in 2021/2022
Gold’s price per troy ounce was at $1900 at the start of 2021 and traded in the $1680 to $1950 range throughout the year, making it a volatile year for the precious metal. Looking at the 5-year price chart by Trending Economics below, we notice that gold has appreciated quite significantly since 2019 when the price was below $1200 per troy ounce (3, chart below).
Gold performed well in 2022 on the background of high inflation and general global financial uncertainty. Since January 1, it has appreciated by over 14% reaching about $2050/troy ounce. Currently the yellow metal trades for about $1902/troy ounce after sharp declines in both March and April (3, chart below).
We believe the main factors that are currently affecting the price of gold are:
1. Hawkish policy by the Federal Reserve leading to increased bond yields.
2. The Russia-Ukraine conflict.
3. Inflation fears.
Hawkish comments by various FOMC officials, including Fed Chair Jerome Powell, reaffirmed bets for a more aggressive policy tightening by the Fed. The markets now expect the US central bank to raise interest rates by 50 bps at each of its next four meetings in May, June, July, and September. This, in turn, was seen as a key factor that prompted fresh selling around the non-yielding yellow metal. (4)
Furthermore, international sanctions aimed at Russia have continued to pile up. Last Thursday (April 21), the United States and its allies announced new restrictions targeting Russia’s defense sector, among others, and blocked financial transactions involving the Russian central bank’s international reserves of gold. (5) Russia is the third-largest exporter of the precious metal and has the fifth largest stockpile of gold in the world. The Russian national bank has been aggressively buying gold in the last years but stopped at the beginning of the pandemic. Usually, in times of political crisis and military conflict, gold is considered a safe investment. With supply chains in Europe being negatively affected once again due to the Russia-Ukraine conflict and prices of commodities and essential goods skyrocketing, some investors are definitely looking towards gold for value protection.
In reality, high inflation expectation is perhaps the biggest supporter of the gold price currently. With the overall increase in prices reaching 8.5% in the US, the highest in the last 20 years, investors are looking for solutions to further currency debasement. As one of the most popular safe-haven assets, gold is likely to benefit from the inflation narrative.
However, according to ABN-AMRO: “investors will continue to buy gold as an inflation hedge. But as the Fed will continue to hike and we also expect a higher dollar, gold’s fortunes will mainly be positive versus other currencies than the dollar. When there is market panic, investors liquidate most positions and buy the most liquid assets such as US Treasuries, the US dollar, and the Japanese yen. They will likely also sell speculative gold positions such as ETFs and other instruments and these positions are extremely large.”
Since 2004 speculation about the gold market has become increasingly popular. The sharp rise in outstanding ETF positions has resulted in a rise in gold prices and vice versa. So gold prices have become more volatile as the metal opened to a large group of investors. This in turn means that speculators with significant gold positions on the derivatives markets could affect the price of the yellow metal.
Looking at the graphs above, we notice that the increase in the price of gold in the last few months was not completely due to an increase in speculative positions (ETFs). According to ABN-AMRO, this could mean that investors have also been buying physical gold that they could potentially self-custody and use as currency in some instances. That further strengthens the “safe-haven” narrative around gold.
So where is the gold price headed? According to Goldman Sachs, gold prices could hit $2,500/oz by year-end. (7) We don’t share Goldman’s enthusiasm. Although investors do display an appetite for the precious metal currently, the opportunity cost of holding it in an environment of rising real rates will dampen investors’ willingness to press the buy button. A strong dollar will further push gold prices down. We don’t foresee significant appreciation in the price of gold in 2022 or 2023 with our forecast matching that provided by Trading Economics:
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1. Wikipedia. Gold. Accessed on 18.04.2022. URL.
2. BullionByPost Website. Uses of gold. Accessed on 18.04.2022. URL.
3. Trading Economics. Gold. Accessed on 18.04.2022. URL.
4. Dua, Sagar. Gold Price Forecast: XAU/USD slides back below $1,900 mark, struggles near monthly low. FxStreet.com. Published on 26.04.2022. Accessed on 26.04.2022. URL.
5. AlJazeera Online. US, G7 freeze Russian gold amid Ukraine war: All you need to know. Published on: 25.04.2022. Accessed on: 25.04.2022. URL.
6. Boele, Georgette. Gold Watch – Impact of the Ukraine war on gold prices. ABN-AMRO Group Economics. Published on: 10.03.2022. Accessed on: 23.04.2022. URL.
7. Wadhwa, Puneet. Goldman Sachs sees gold prices hitting $2,500/oz by year-end. Business-standard.com. Updated on 23.03.2022. Accessed on: 25.04.2022. URL.