The question many investors are asking is, why haven't gold and silver rallied this year while inflation runs excessively hot? There are several possible reasons, a few of which are explored below.
Currently, gold is outperforming US Treasury Inflation-Protected Securities (TIPS), US and foreign bonds, the NASDAQ, S&P 500, foreign stock, and a basket of foreign currencies. So far, the biggest challengers to gold have been commodities and the US dollar.
As of today, the gold spot price has fallen 5% year-over-year (YoY) but is faring way better than the majority of asset classes. If you hold some gold in your portfolio, it should be hedging fairly well against those losses.
The US dollar gained strength against other currencies and assets in 2022, despite high inflation. Even though the dollar is at a 20-year high, it doesn’t mean the dollar isn’t losing buying power.
So far this year, the average American household has spent $5,200 more on a basket of goods than they did in 2021. That means an average American has to fork out over $433 a month extra if they want to maintain the same living standards as they did the year before! Overall, the dollar’s purchasing power is significantly lower year-over-year.
So, when you hear that the dollar is strong, it is being compared to a basket of leading currencies. That’s because other currencies are suffering due to rapidly shrinking economies and loose monetary policies.
Earlier this week, the British pound fell to a record low of $1.03 against the US dollar. Then it slightly rose to $1.07. This crash followed an announcement by the British government stating that they will implement the largest tax cuts in 50 years.
The British economy is facing high inflation rates and even higher government borrowing. This has led many investors to speculate about a complete economic crash in the UK is becoming more probable.
The Japanese yen, Chinese yuan, and EU’s euro have also lost significant value against the dollar and gold.
All of these currencies are weaker against the dollar because their corresponding central banks have been hesitant to increase interest rates and tighten their monetary policies.
However, these financial bodies are starting to change their tune, with the Bank of England and the European Central Bank beginning to increase interest rates. This will challenge the US dollar’s dominance once the Fed reaches its interest rate ceiling. The Fed can only raise rates to a certain point because the cost to service the country’s debt would become unsustainable.
At that point, the dollar would regress. That’s when many analysts predict that gold will begin to gain against the dollar.
Gold is Still Holding Strong
Although gold has not reached the record highs that many have predicted, the metal is doing better than expected. According to the World Gold Council (WGC), gold should have fallen by 30% due to interest rates and a stronger dollar.
Clearly, that is not the case. Gold has remained fairly stable.
The WGC stated the following: “The fact that gold has performed as well as it has, all things considered, is a testament to its global appeal and more nuanced reaction to a wider set of variables.”
While geopolitical problems and inflation increase across the world, institutions will continue to purchase gold as a safe haven.