Gold has proved resilient amid the inflation crisis of 2022, as equities, bonds and crypto sank.
In a high-volatility environment, the MSCI World index lost more than 20% over the first six months of the year (in US dollar terms) and investors have been seeking less risky assets than equities.
Traditionally a safe haven, gold peaked in March. It price fell but continued to hold firm for UK investors since, as shown in the graph below.
Gold vs global stocks over 1yr
Source: FE Analytics. Total return in sterling between 4 Aug 2021 and 2 Aug 2021
BullionVault director of research Adrian Ash highlighted how physical bullion was the best-performing asset during the initial deflationary wave of the Covid crisis, when crude oil prices dropped below zero, and how it has now outperformed all major asset classes except crude oil as inflation jumps to 40-year highs.
Although the rise in interest rates does present a headwind to gold prices, as the metal pays no income, Ash believes that its success in 2022 so far is likely to attract fresh inflows if the slump in world stock markets continues in the second half of the year.
Moreover, “the risk of recession becoming longer-term stagflation is likely to see portfolio managers and other existing investors continue to hold tight to gold as a form of insurance”, he added.
Ned Naylor-Leyland, manager of the $838m Jupiter Gold And Silver fund, agreed and went further to predict a rebound in gold prices should the US Federal Reserve ease off its current hawkish path.
Many economists are already taking a recession for granted, as they believe the Fed is likely to increase interest rates a step too far, overtightening market conditions and weakening the economy.
“This is where the value of holding alternative currencies such as gold and silver will come good,” said Naylor-Leyland.
As falling real yields mean a higher gold price, “gold and silver are bets that future real rates are not going to rise as much as the market thinks because the Fed won’t be able to pull it off”.
In a scenario with a weak economy bordering recession, further rate hikes could become too painful and result in rate expectations dissolving in the yield curve more quickly than inflation expectations.
“A hard landing or recession won’t necessarily make inflation go away – think about stagflation. On the other hand, rate hike expectations would disappear pretty quickly, in my opinion. That would be good for gold and silver,” said Naylor-Leyland.
“Gold is trading around $1,700/oz and to get to $2,100/oz, as it was in March, it would again be challenging the inflation-adjusted all-time high. I think that gold has a very good chance of breaking through the $2,100/oz record. Records are made to be broken and dollar strength will not last forever.
“Looking ahead, I think the conditions are right for a move back to a more dovish environment and a Fed pivot. That’s why I believe it’s the perfect time for prudent investors to own gold and silver.”
This is an especially good entry point for investors, as participation in the gold market is at historic lows, he added.