Gold futures in the U.S. soared to a one-month high after inflation data showed a 40-year high of $1877.5, up $26 or 1.3 percent for the day.
The benchmark gold futures contract was also up 1.3% for the week.
By Tradingview
Gold is one of the main protections against inflation, and it usually goes up when the purchasing power of the dollar goes down. However that is not always the case, this year along with the inflation data, gold was also falling. There have been precedents where rising inflation has supported gold prices, and the dollar has also risen amid expectations of a rate hike.
“The initial shock from the scalding-hot inflation report sent gold prices to new session lows as traders quickly raised expectations of a Fed rate hike at the September meeting,” said Ed Moya, an analyst at the online trading platform OANDA. “Then 5-year and 30-year Treasury bond yields inverted, and growth concerns triggered some safe haven flows for gold.”
Published in late April, the report of the World Gold Council said that demand for gold in the first quarter of 2022 rose by 34% (reaching 1,234 tons) compared with the first quarter of 2021 .
The key factors affecting both price and demand are rising inflation and the invasion of Ukraine.
Inflation is at a 20-year high in Australia, a 30-year high in much of Europe and a 40-year high in the US. Against this backdrop of sustained inflation, institutional interest in gold is naturally on the rise.
Gold can be protective for investors against inflation, including high and extreme inflation .
The average annual return of 11% in U.S. dollars over the last 50 years has outpaced the U.S. and world consumer price index (CPI).
Previously, when inflation rose more than 3%, the price of gold rose about 14% per year, and the more inflation rose, the more the price of gold rose. That is, gold helped preserve and increase capital in the long run.
The report notes that gold also maintains demand during periods of deflation, as research shows.
During such periods, consumption and investment is slowing down and low financial rates, as well as financial stress, help maintain or even increase the demand for gold.
Moreover, gold is a strategic asset and as a source of long-term returns, it is superior to many other asset classes. Gold is an effective way to diversify risk during recessions, as it works differently than other assets.
Also, more than $145 billion is traded daily, which speaks to the liquidity of this asset. When gold is directly owned, as a physical asset, it does not carry credit risk. For these reasons, gold is a popular strategic asset.
To date, the consumer price index has grown by 8.6% and continues to rise, while the consumer sentiment index is a record drop in the last month, Americans are pessimistic about constantly rising prices.
However, demand is likely to hold up through the end of the year as many countries emerge from the pandemic. Demand for institutional investment is likely to be more volatile for the rest of the year, given the significant fluctuations in the markets.
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