Despite the ongoing market volatility, the price of gold remains resiliently steady. Surprisingly, gold continues to detach itself from its usual price drivers such as bond yields and the dollar.
Price of Gold Holds Above $1,800/oz
By the end of last month, 10-year Treasury yields and the US dollar index rose from intra-year lows. However, gold remained steady at $1,800 per troy ounce. Over the weekend, spot gold also traded around that $1,800 benchmark.
Meanwhile, Bank of America analysts noted that investment flows into gold remain resilient despite surging inflation and supply chain issues. BofA analysts issued a research note last week.
They said that there are “significant dislocations buried beneath headline inflation, interest rates, and currency moves”. These raise the appeal of investing in gold. As a result, conditions support “our $1,925/oz average gold price forecast for 2022,”
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Tried and Tested Insurance Characteristics
According to UBS, other factors are holding up the price of gold. One is the increasing demand for portfolio hedges. The other is a belief that the Federal Reserve will either underplay or overplay its hand in tackling inflation.
Whether it “stays behind the curve” or overtightens its monetary policies, the Fed’s action can stunt the economy’s growth.
UBS Chief Investment Office strategists commended gold’s “tried-and-tested insurance characteristics” versus other portfolio diversifiers. This included digital assets such as bitcoin and ethereum.
In fact, gold’s overall stability despite a hawkish turn by the Fed surprised many in the industry. “But, alternatively, the yellow metal’s resilience is broadly in line with our estimate generated by our fair-value model,” UBS said.
The bank said it values the price of gold at $1,750/oz. UBS said that this rate is “a modest $50/oz discount to spot.”
Higher Volatility in 2022 Is A Key Pillar For Gold Prices
UBS’ models indicate that higher market volatility so far this year will help support the price of gold. The longer-term average value of the VIX at 19.5 signals the price of gold at $1,575/oz.
However, 2022 showed an elevated demand for portfolio hedges. This is supportive of UBS’ forecast of $1,800/oz. This is according to UBS strategists Wayne Gordon, Giovanni Staunovo, and Dominic Schnider.
UBS added that for gold to fall to the $1,650-1,700/oz range in 2022’s 2nd half, the Omicron threat and inflation fears should abate. “We recommend clients to reduce tactical allocations and protect the downside of strategic holdings,” they added.
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How To Go Beyond $1,800/oz
For the price of gold to exceed $1,800/oz, markets will have to rely less on the central bank’s plans to tighten monetary policy. This is according to Russ Mould, investment director at AJ Bell. Mould suggested that this could happen if the economy tips into recession.
Once central banks get overrun with the combination of global debts and higher interest rates, policymakers might turn back. They can start cutting borrowing costs and add to quantitative easing even before they address inflation.
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Are you holding on to gold investments right now? Do you see the gold prices holding up even as inflation continues to rise?
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