If you want to make sure that your money is not drained by inflation, consider investing in gold. This precious metal has been growing in value since the early 2000s, and it’s expected to keep rising in value in the years to come. Here are some things to consider about this investment option.
Demand for gold in the first quarter of 2022
The demand for gold in the first quarter of 2022 jumped 34% year over year, to 1,234 tonnes. This represents the largest increase in demand in a quarter since 2018. The demand was 19% higher than the five-year average. Inflation and Russia’s invasion of Ukraine helped fuel the increase in demand.
Although the consumer driven demand for gold is expected to slow, pockets of strength should remain in the economy. For example, strong ETF inflows are helping to drive up gold demand in the first half of 2022. Total demand for gold in the first half of 2022 is up 12% to 2,189 tonnes, with the demand for gold bar and coin staying flat. A sharp drop in China’s demand was partially offset by growth in India and the Middle East.
According to Louise Street, senior analyst at the World Gold Council, the global gold market was supported by a combination of factors in the first half of 2022. She notes that high inflation and geopolitical uncertainty have been factors supporting the demand for gold, but higher interest rates and a stronger dollar have also dampened the outlook.
Inflows into gold-backed ETFs in the first quarter of 2022 rose to the highest quarterly level since the third quarter of 2020. The increase in ETF gold holdings reversed the 174-tonne outflow from gold-backed ETFs in the first half of 2021. While this is not as strong as the first quarter of 2016, demand for gold in the first quarter of 2022 is still 11% higher than the five-year quarterly average.
While the jewelry sector was a bright spot for the gold market, the ongoing COVID lockdowns in China weighed on demand. However, India’s demand for gold rose 49% from 2021, despite China’s COVID lockdowns. However, India’s economy is still uncertain, which could negatively impact the demand for gold. Furthermore, the INR-USD exchange rate is likely to further dampen gold purchases.
Volatility of the gold mining market
In 2018, the gold mining market was rewarded for aggressive growth over cash flow generation, while mining companies took record levels of debt to finance their operations. This trend has reversed this year, with gold miners reporting mixed results. While increasing exploration spending supported margins, higher profitability failed to provide a tailwind and price sentiment weakened.
A key concern for gold miners is the continued high inflation rate. While it is difficult to predict the future of global inflation, recent economic data suggests that the U.S. will experience multi-decade high inflation, which is already impacting the industry’s bottom line. Furthermore, the recent Russian military intervention is likely to exacerbate these costs for gold producers. Traders have already priced in another hike at the Federal Reserve’s four meetings in 2022. Meanwhile, Kinross Gold recently halted operations at its Kupol mine in Russia. Although the mine is expected to produce 35,000 ounces of gold this year, the company is only producing 13% of the projected output.
However, the price of gold has been historically volatile. It has been impacted by the COVID virus pandemic, equities market bounce, and the scope of global government stimulus efforts. As a result, higher prices have negatively impacted jewellery sales. The gold mining industry is an international business, with operations on every continent except Antarctica. It uses various mining methods to extract gold.
In Q2’22, the production of gold miners rose by an average of 0.75%, while a large percentage of production came from troubled mines. On the other hand, pan American Silver clarified a one-time inventory charge that would have reduced AISCs from $2,051 to $1,540. First Majestic Silver anticipates that AISCs will be near $1,800 by H2’22.
In 2022, global gold mining market is expected to expand at a considerable pace. Rising adoption of strategies by key players will fuel the growth of the industry. It is estimated that by 2028, the global gold mining market will be worth a multi-million dollar amount.
Performance of gold in many other currencies
Gold continues to be a popular asset regardless of the monetary policy in place. However, it faces stiff competition from alternative assets, such as cryptocurrencies. These digital currencies are extremely scarce and many investors use them as a hedge against inflation, which has led to the recent crash. Gold, on the other hand, is considered a safe haven asset, and it has both anti-cyclical and pro-cyclical characteristics.
The price of gold has remained relatively stable for much of the last three years. However, the performance of gold against other currencies will depend on a number of factors. One factor is the interest rates of other nations. While the Eurozone has low interest rates, the dollar remains strong against many other currencies. As a result, rising interest rates may hurt gold prices.
The price of gold will also depend on global economic growth and the pace of central bank tightening. However, many analysts and algorithmic forecasting tools may have difficulty providing reliable long-term estimates. Therefore, investors must conduct their own research. Past performance is no guarantee of future returns, and investors should never invest money they cannot afford to lose.
While gold has an excellent history of increasing in value in bear markets, its performance in other market environments has been uneven. While it performed well during the 1970s inflationary environment, it lagged behind stocks in the first half of the 1980s. Gold also lagged behind stocks in the early 2010 “lost decade,” generating negative returns during the early part of the decade.
Several factors have weighed on gold prices over the last year. While the US dollar’s recent appreciation has been a headwind for gold when measured in US dollars, it has been a positive force for gold in other currencies. As a result, gold prices in other currencies have been positively impacted by rising interest rates.
Despite its recent price decline, gold remains an excellent safe haven asset. Its reputation as a hedge asset is justified, especially in times of extreme market volatility. While gold prices have been a little lower this year than in previous years, they have served as a safety blanket for investors. The continued conflict in Ukraine should continue to support its price, providing a safe place to put money during times of high global risk.
Ideal asset allocation for temporary cash flow problems
An ideal asset allocation for temporary cash flow problems will include a five to 10 percent allocation to gold. This allocation should not be too high or too low. If you invest too little in gold, you are missing out on the higher growth rates of this precious metal. On the other hand, if you invest nothing in gold, you leave yourself vulnerable to certain risks in a market that doesn’t always compensate for those risks. For example, Shark Tank investor Kevin O’Leary invests 5% of his portfolio in gold bullion and gold ETFs.