Due to its long history as a store of value, investors have long embraced gold as protection against market risks including stock volatility and currency swings. However, given that other asset classes, such as cryptocurrencies, have grown significantly, many investors are unsure about gold’s continued value as a component of their portfolios.
A number of reasons, including central bank activity, prospective interest rate adjustments, and escalating inflation, have contributed to gold’s recent underperformance and are eroding investor trust in the long-established safe-haven commodity.
Is there a buying chance for gold or should investors wait to purchase the precious metal?
The Price of Gold in 2021
When the cost of goods and services is growing, as it is right now, investors typically allocate toward assets that safeguard against inflation. Nevertheless, gold’s demand has decreased. The third quarter saw a 7% year over year decline in gold demand, and the year to date decline is above 9%, according to Goldhub.
The price of gold is currently around $1,800 per ounce, which is up significantly from values seen three and five years ago but down about 5 percent for the year. The price is historically high even if it seems to be behind.
In August 2020, gold broke a record, reaching $2,000, and has subsequently declined by around 10%. According to Joseph Sherman, CEO of Gold Alliance, “the majority of people look at gold in the previous few months and question why is gold not growing in the short term if Inflation is rising.”
Factors Affecting Gold’s Price
Economic policy, according to Sherman, is the cause of the problem: “The monetary expansion and stimulus has filled the markets with trillions of dollars, squashing fear and encouraging risk assets to skyrocket, like cryptos, stocks, junk bonds, and real estate.”
Investors are therefore prepared to accept greater risk in order to offset inflation. Investors are looking to other assets, including equities, for a higher yield since the price of gold has stalled.
The emergence of cryptocurrencies, which may be reducing gold’s market share, is another factor that affects gold prices. Gold exchange-traded fund outflows, which persisted in the third quarter, are a major indicator of this declining demand.
Whether bitcoin may serve a similar purpose to gold’s conventional function is a topic of continuing discussion among investors. Despite the fact that Bitcoin’s value is far from constant, some people still compare the leading cryptocurrency to gold due to its limited quantity and high performance potential. But although Bitcoin is a new asset, gold is a tried-and-true asset, increasing investor risk.
Is Gold Still a Good Inflation Hedge?
Since gold tends to keep its value over the long term despite changes, its proponents have historically viewed it as a safe-harbor asset that safeguards buying power against inflation during difficult economic times.
Even while there is a correlation between gold and inflation, Mahesh Agrawal, associate director at Acuity Knowledge Partners, thinks that association may break down in the near future because gold is more affected by bond yields, U.S. currency volatility, and other threats than inflation. But as long as the current inflationary environment lasts, gold is likely to resume its reputation as an inflation hedge.
Future Prospects of Gold
The direction the Federal Reserve chooses with monetary policy is a significant issue that will influence the future of gold prices.
A less rosy scenario for gold is that the Fed will begin raising interest rates in 2022. This is because investing in gold becomes more expensive relative to other investments when interest rates rise because gold is a non-dividend and non-interest bearing asset. Gold may not be a desirable asset for investors to have in their portfolios in a rising rate environment, which could affect future investor holdings of gold and exert downward pressure on the price.
China is the world’s fastest-growing market for gold, and India’s impact on the growth of the precious metal is expanding. Another element that can help gold prices is the World Gold Council’s claim that Chinese buyers of gold view price declines as buying opportunities.
