Should You Invest in Gold in 2022?

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Should You Invest in Gold in 2022

We’re at a time in human existence where even teenagers are well aware of the importance of building a solid investment portfolio early on. To build wealth, one must invest a portion of one’s earnings and take advantage of compounding interests and, for youngsters, time. Many parents today open investment accounts for their kids the moment they are born. Some of these investment accounts, like the Custodial Roth IRA, come with many perks.

Now, what one decides to invest in is entirely one’s decision but we’ve found that most new and inexperienced investors play it safe, as they should. They usually kick off their portfolio focusing mainly on stocks and bonds that tend to offer healthy returns. Click here to learn more about getting started with an investment portfolio.

That said, 2022 has been a really challenging year for both amateur and seasoned investors around the world. Several factors including rising global inflation and geo-political instability caused by the Russian-Ukraine war have led to a disappointing performance of the financial market for the better part of the year. For new investors, there couldn’t be a worse time to enter the market with stocks being so unstable.

Analysts say that 2022 has been the worst year for markets in at least 50 years. As of the end of the third quarter (Q3), the S & P 500 had fallen 25.2% below its all-time high of 4,796.56 recorded on 3 January 2022. Unfortunately, gold which has the reputation for performing well in market conditions like this also took a hit, especially in the US.

What Caused Gold’s Poor Performance so far this Year?

Historically, gold has a reputation for performing well in times of inflation and general economic instability. At such times, people purchase the precious metal to protect their funds from the negative impact of inflation. Also, it has been known to perform inversely to the stock market such that when the stock market goes down, the value of gold increases. This year, however, despite these typical prime gold price conditions in place, the shiny metal hasn’t lived up to expectations.

Gold’s best performance this year was on 8 March when it reached its highest ever recorded value of $2,074.60/ounce. It has since dropped and at the time of writing is trading at $1,660. So, what’s responsible and why hasn’t this precious metal performed as expected this year?

Perhaps, what has had the most negative effect on gold this year is the fact that the dollar is the strongest it has ever been in 20 years. The US Dollar Index which weighs the dollar against a basket of other global currencies reached 114.78, its highest in 20 years. This is a problem because gold and the US Dollar tend to behave opposite to each other, an inverse correlation. Since the dollar is so strong, demand for gold has fallen, making it a victim of opportunity cost. So, is there hope for the shiny precious metal? Visit https://www.forbes.com/advisor/investing/dollar-index/ to learn more about the US Dollar Index.

Invest in Gold

Looking Forward: What Analysts Are Saying

Now we know for a fact that gold’s disappointing performance is due to two main factors. One is increased interest rates by the US Federal Reserve, Bank of England, and Swiss National Bank to curb ballooning inflation, and two, the dollar being its strongest in the last two decades. But these conditions are expected to change and the market will correct itself.

Analysts are predicting a dollar reversal that would offer an almost immediate gain for the precious metal. The Gold Return Attribution Model (GRAM) which simplifies the historical analysis of gold price drivers estimates a price elasticity of 0.88. In simple terms, what this means is that if the dollar falls 1%, with every other factor being constant, gold will rise 0.88%. Since the dollar is up 15% at the time of writing, a full reversal would imply a 13% rise in the value of gold.

Furthermore, if the dollar were to fall even further, investors would seek out a risk asset to hedge against inflation. And historically, that risk asset has been this precious metal. This would increase its demand and consequently, its value. Analysts at ABN Amro, the third largest Dutch bank, say they think the gold price outlook is positive. They expect the dollar to weaken and the Fed to start cutting down hikes in interest rates in the second half of 2023. Overall, they’re forecasting that the metal will trade at $1900/ounce at the end of 2023. Recall that gold is currently trading at $1660 at the time of writing this article.

Staying on top of developments in the financial market is vital if you manage your portfolio. Luckily, there are a ton of trustworthy sites online that provide expert analysis on different investment options. You can check out Metal res if you’re considering exploring that option. 

How Can You Invest in Gold?

There are several ways one can invest in gold. However, some of these options have certain advantages that are unique to others. For example, some gold investments are safer while others provide greater liquidity. That said, the most common ways people invest in this precious metal are:

  • Gold-backed ETFs
  • Gold bars and coins
  • Jewelry
  • Gold-backed stocks.

Final Thoughts

While the degree of risks one is exposed to varies across different investment options, it should be made clear that there’s no investment without risks. It is therefore important to only invest money that you can afford to lose in the event that things go sideways like they’ve done so far this year.

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