Gold is one of the most popular investments in the market today, and investors are looking to the metal to protect themselves from inflation. However, in order to do this, they need to understand the basics of inflation. The term is defined as the increase in the prices of goods and services over time.
Demand for gold from exchange traded funds
Gold exchange traded funds continue to be popular with investors. While they can be volatile, they have historically held value well over the long term. However, the market has been moving in the wrong direction in the past year. Consequently, it is important to monitor your holdings regularly to make sure that they are not overvalued.
Gold’s price has declined modestly following the Federal Reserve’s recent interest rate hike. The Fed has indicated it expects to raise rates another three quarters of a percentage point in December.
As the inflation war continues, the Federal Reserve has signaled it is prepared to raise interest rates even further. This has pushed the US dollar to record highs against a basket of major currencies.
Several central banks have started diversifying into gold. In addition to physical gold coins and bars, ETFs have become increasingly popular. These are funds that invest in companies that produce gold. Purchasing these funds helps to drive total gold demand.
Russia’s threat of an invasion of Ukraine
Russia’s threat of an invasion of Ukraine has thrown global financial markets into turmoil. Although the apocalyptic scenario is far off, it has triggered a new wave of interest in safe haven assets like gold.
Gold’s price has climbed over the past few months, despite a more hawkish US Federal Reserve. However, analysts aren’t yet convinced the price will continue to soar.
A key question is how Russia will respond to an expected Western military strike. The Kremlin has already warned the West of its plans to use nuclear weapons in response to a possible attack. It is also unclear whether Western governments will do what they can to deter Russian retaliation.
Some Western policymakers are even wondering if the United States is doing too much to support Ukraine’s war effort. In any event, Moscow has clearly made the nuclear threat a centerpiece of its public relations campaign.
Besides the fact that a nuclear strike would draw the attention of the world’s largest military alliance, there is no evidence that the Russian government actually has a plan to carry out a nuclear strike.
Rising inflation
When inflation reaches double digits, gold prices tend to jump. However, the gold price has slowed down in recent years. This is not to say that gold hasn’t performed well. But it’s important to remember that gold is not a perfect indicator of inflation.
The Federal Reserve has raised interest rates several times this year. In response, some investors are worried that this will lead to a recession.
Gold is considered a safe investment during market volatility. Some investors also believe that gold is a hedge against inflation. As an example, a US inflation report shows that consumer prices rose 8.5% in August compared to a year ago.
The Fed has also indicated that they will hike rates again. A 75-basis point increase is scheduled for next week.
As inflation continues to rise, gold and silver will likely be pressured. However, the Fed may be able to meet its inflation goal without tanking the economy.
US recession
Gold prices are currently down about 40% from a record high of US$2,087 per ounce hit in March. However, the price has fallen less than the stock market. The Federal Reserve recently signaled significant interest rate hikes.
Inflation is a concern for many policymakers. It’s also a major concern for everyday Americans. One study found that 18 percent of respondents named inflation as the biggest problem they face.
Despite the fact that inflation is above the 1970s peak, it’s still lower than it was during the great depression. However, the Fed has fought runaway inflation by raising rates. This has some investors worried about the possibility of a recession.
Gold is a safe haven. Central bankers have a lot of gold in their reserves. They’re diversifying into other assets. But with the rising price of government bonds, the opportunity cost of holding gold is higher.
Another factor underlying the price of gold is investment demand. While the Fed is raising rates, the stock market has been down. Investing in gold could help keep a portfolio in line with inflation.