Gold prices recently fell by over 1.5% to their lowest since April 2020, CNBC reports. Spot gold dipped by 1.6% to $1,643.51 per ounce, following a previous 1.8% drop to $1,640.20 earlier in the year, while U.S. gold futures are now at $1,651, a 1.8% drop. Gold’s fall follows an “unrelenting rally in the U.S. dollar” which comparatively hit a 20-year high as a result of the Federal Reserve’s action to control surging inflation. “This should see (gold) prices trading broadly sideways over the rest of the year,” comments Fitch Solutions.
A vulnerable short-term investment
“We’re seeing relentless dollar strength here and that’s going to keep gold vulnerable in the short term,” said Edward Moya, senior analyst with OANDA. “The economy is clearly heading towards a recession. The risks of a hard landing are elevated and this has been just continuing to drive flows into the dollar, which has been bad news for gold.” Gold is particularly vulnerable to increasing interest rates, which boost the dollar and increase the value of higher-yielding investments, while sending gold lower.
Diversifying portfolios with gold
Despite recent volitarity, gold can still be a valuable addition used to diversify portfolios, which in turn helps lower investment risk. “In general, although each investor’s situation is unique, we believe a 3-5% allocation to gold products would seem adequately sized to capture the benefits of holding gold as an asset class,” advises Imaru Casanova, deputy portfolio manager/senior gold analyst at VanEck. While purchasing physical gold at spot price – the metal’s current base price at this exact moment in time, rather than some future price – usually involves paying a slight premium, investors can take steps to avoid this. Purchasing gold with cash in-person removes the need for pricy middlemen and therefore eliminates the extra premium.
Other precious metals following suit
“Gold and the other semi-investment metals like silver and platinum will likely continue to remain under pressure until the market reaches peak hawkishness,” comments Ole Hansen, Saxo Bank’s head of commodity strategy. Aside from gold, other precious metals also experienced a decline. Spot palladium, in particular, decreased by 4.8% to $2,066.01, platinum by 4.8% to $856.81, and silver by 4% to $18.86 per ounce.
Ultimately, “weakness in bullion is very likely to persist due to monetary tightening that makes gold costlier to hold,” notes Gnanasekar Thiagarajan, director at Commtrendz Risk Management Services. “However, recession fears and any escalation in the Russia and Ukraine conflict could support prices.”