Gold prices have recently entered a bear market. Recently, however, the signs have been pointing to recovery again. These factors remain important for investors for further price development.
• Gold falls more than 20 percent from its 52-week high, entering bear market
• Higher inflation expectations and possible interest rate hikes by the US Federal Reserve are increasing pressure on interest-free precious metals
• Experts continue to see gold as a portfolio building block, but point out the importance of further interest rate developments for the price direction
Gold enters bear market
Gold prices recently slipped below its 200-day moving average and also 20 percent below its January 52-week high of $5,416.40. Gold thus entered a bear market. As MarketWatch reported, citing Dow Jones Market Data, it was the fastest entry into a bear market since the height of the 2008 financial crisis: 91 days passed that year, while in 2008 prices fell 20 percent or more from their recent peak in 23 days.
Geopolitical tensions, inflation and interest rates
The decline in gold prices was largely due to interest rate trends, according to Chris Gaffney, president of global markets at EverBank. A higher-than-expected US consumer price index led investors to assume that the US Federal Reserve would raise interest rates at its next meeting. Recently, geopolitical tensions have put upward pressure on oil prices, which usually results in prolonged, higher inflation.
Since gold does not generate current income, owning it becomes less attractive compared to interest-bearing investments when interest rates rise. Against this background, traders have recently favored US government bonds, according to Naeem Aslam, Chief Investment Officer at Zaye Capital Markets. “Gold doesn’t bring any returns, while treasuries and other bonds pay you to park your money risk-free,” said Aslam.
Gold in lockstep with the stock markets
As Michael Armbruster, co-founder and managing partner of futures broker Altavest, told MarketWatch, gold moves in lockstep with stock markets. So it’s hardly surprising that with the news of an agreement between the USA and Iran in the Middle East conflict, not only the stock markets but also the gold price went up again at the start of the week.
Still, MarketWatch columnist Mark Hulbert warns against relying on gold to always be supported by changes in the geopolitical situation. According to Hulbert, there is no reliable connection between geopolitical risks and the development of the gold price.
What does this mean for investors?
According to Justin Lin, analyst at asset manager Global X Management in New York, gold could benefit from a lasting easing of tensions in the Middle East conflict, as dpa-AFX reports. If there is a final agreement and the reopening of the Strait of Hormuz, concerns about energy supplies should ease. This could prompt central banks to significantly increase their gold purchases again and thus provide additional support for the gold price.
According to EverBank’s Chris Gaffney, gold should remain an important part of investors’ portfolios because it acts as “catastrophe insurance.” “The current sell-off appears to be an excellent opportunity to invest additional capital in the precious metals market,” MarketWatch quoted Gaffney as saying. Nevertheless, he sees negative factors for the gold price as long as the US Federal Reserve’s further interest rate rate is uncertain.
Julia Walter, editorial team at finanzen.net