The yellow metal is currently in a contradictory state. On the one hand, gold continues to play the role of a protective asset, and on the other hand, demand for it periodically falls. As a result, gold remains under the pressure of price "swings", which weaken it and cause investors' fears.
For a long time, especially during periods of economic turmoil, investors have considered the yellow metal as a classic protective asset. At the moment, these sentiments have intensified. Market participants consider gold to be the most suitable tool for saving money in the long term. This statement is not without reason: the value of gold is less volatile and more stable than the price of stocks or bonds. In addition, the yellow metal is not at risk of default or depreciation.
However, since the beginning of March 2022, the situation on the precious metals market has changed. Instead of confidence, tension has come, threatening to escalate into instability. The growing risks of recession added fuel to the fire, against which gold fell in price by 20%. According to analysts, by September 25, the gold futures price was $1,651 per 1 ounce, being at the lowest since April 2020. On Wednesday, September 28, gold was trading at $1,627.95, trying to get out of the downward spiral.
According to experts, the price of precious metals strongly depends on the level of real rates, as well as on the difference between the nominal rate and the inflation rate. Recall that after the September meeting, the Federal Reserve raised the interest rate again (by 0.75 bps, to 3-3.25% per annum). At the same time, analysts admit that the US central bank may raise it to 4% or higher by the end of 2022. In such a situation, another round of inflation is possible, experts believe. This will provoke an increase in real rates, with an increase in which it becomes impractical to invest in gold. As a result, the function of the yellow metal as a protective asset is weakened and it loses value.
At the moment, the Fed's monetary policy is a key factor in the dynamics of gold prices. According to experts, gold is supported by investors' faith in the US central bank and in its ability to curb rising inflation. However, if the Fed rate rises further, gold will continue to fall in price against the dollar. Against this background, over the past six weeks, large money managers have been reducing their long positions on gold. However, according to John Paulson, a billionaire investor and founder of Paulson & Co., gold is able to regain its value if the current monetary policy in the United States changes. According to Paulson, with a further increase in interest rates, investors will lose confidence in the Fed. As a result, long-term inflation expectations will rise, while the demand for the yellow metal as a means of hedging risks will increase. The rise in the price of gold is also possible if the Fed fails to curb inflation, Paulson believes.
According to Societe Generale's currency strategists, demand for the yellow metal will remain low in the near future. Experts pay attention to the bearish sentiment towards gold, which continues for the sixth consecutive week. At the same time, the Fed's rate hike supports the greenback, and this "makes gold less accessible to non-American buyers, which is why demand for it is declining," the bank emphasizes.
The current geopolitical situation can support the high price of gold, but most international investors do not intend to ignore the dynamics of the real rate. Many of them believe that a mass flight to gold is not an option, although they still consider the precious metal a "safe haven". Analysts consider this fact to be confirmed by the fact that the quotes of the yellow metal are near $1,600 per 1 ounce. This indicates the preferences of investors who are escaping from geopolitical turmoil by investing in a traditional protective asset.
According to analysts, in the near future the demand for yellow metal will be uneven, "swing-like". At the moment, gold is trying to maintain stability, remaining the most reliable among other protective assets. Despite the difficult geopolitical situation, experts expect to maintain a positive trend towards gold in the medium and long-term planning horizons.