The price of gold was already on the rise before the Covid-19 pandemic happened and the Ukraine conflict sparked renewed investor interest in the yellow metal.
Today, gold shows its true potential once again, thanks to a number of important drivers that are currently in play.
Below, we look at 4 major trends that suggest the gold price could go up next year.
Trend Number 1: The gold price usually performs well during stagflation
Following the Russian invasion of Ukraine, fuel, energy, and commodity prices spiked to record levels in the U.S. and Europe, impacting consumer confidence and retail sales.
In addition, the Covid pandemic is crippling the economy's capacity to produce goods and services at a given price, further fueling inflation and stifling growth. Two signs indicating that the situation is ripe for stagflation.
Historical data shows that gold has performed significantly better than other asset classes during periods of stagflation.
And there are several factors in the current market environment that suggest gold may benefit from a new stagflationary period.
Here’s why:
unlike riskier assets like stocks and crypto, gold has withstood the financial market declines so far in 2022, proving time and again its role as a hedge against inflation and market volatility.
Take a look at the chart below:
As you can see, only gold has maintained its value in 2022, with the exception of commodities whose prices have increased due to inflation, the supply chain crisis, and the war in Ukraine. All other major investments have been falling at an alarming rate.
What does it mean for investors?
Basically, one thing:
If your portfolio has riskier investments (stocks, crypto, etc.), now could be a good time to balance it out with assets that work best during stagflation: gold and precious metals.
Trend #2: The general demand for gold is rising
Following the Covid-19 pandemic and Russia’s invasion of Ukraine, investors rushed to the safety of gold, pushing its price to new records.
This increased investor demand comes after an already strong year for physical gold buying.
According to the World Gold Council, demand for gold bars and coins reached 1,124 tonnes in 2021, the highest level in almost a decade.
Central banks, too, have been adding gold to their reserves as a protection against growing geopolitical and economic troubles (including inflation).
Overall, central banks bought 19.4 tonnes of gold in April, more than double from the previous quarter, and remained net buyers in 2022.
Finally, when it comes to gold’s industrial use, demand for the metal in the technology sector saw a rapid recovery from the depths of Covid-19 in 2021, growing 9% to 272 tonnes.
In general, overall demand increased by 34% y-o-y to 1,234 tonnes – the highest since Q4 2018 and 19% above the five-year average.
If you need a visual to help you better understand gold demand trends of 2022, here’s a great chart that shows that the overall investor demand for gold has been on the rise:
Although retail investment was weaker at the beginning of the year, mostly due to tough new lockdowns in China and the resurgence of COVID-19 cases, it still is 11% above its five-year quarterly average, according to the World Gold Council.
More importantly, analysts say central banks around the world are likely to continue to buy gold through 2022 as an important reserve asset.
That’s how they explain it:
"The planned purchases are chiefly motivated by increasing concern about a possible global financial crisis, although anticipated changes in the international monetary system and concerns over rising economic risks in reserve currency economies are also major factors.”
What does it mean for investors?
Essentially, two things:
- Increased investor interest tends to push the gold price up: just as it happened in the wake of Russia’s invasion of Ukraine in early February, when gold prices almost hit their highest level and gold resellers sold double or triple what they normally do.
Today, there’s a big chance the momentum for gold will continue, considering the negative economic impact coming from the Russia-Ukraine conflict and persistently high inflation.
- You could follow the example of central banks and start building your own “gold reserve”: this will help you ensure your financial security and protect you in case of an emergency.
Even if it won’t immediately solve your money problems, it will give you a plan of action when dealing with an inflated economy and interest rate hikes by the Federal Reserve and most other central banks.
Trend #3: Geopolitical crises are driving the gold price and demand
In times of war, the fear factor often pushes investors to move their capital out of riskier assets and countries, and buy gold as a long-term safe-haven investment.
The war in Ukraine has wreaked havoc on the global market, pushing up commodity and energy prices, closing markets, and shifting funds, all of which made investors seek the protection of assets such as gold and precious metals.
This created a boom for bullion dealers, many of whom saw their usual sales levels skyrocket (at GOLD AVENUE we doubled our sales in March 2022 compared to the previous month).
And with more potential geopolitical trouble ahead (Russia-E.U/U.S., E.U-China, China-Taiwan) gold is likely to keep playing an important role.
What does it mean for investors?
Among many other things you could do, think about this one first:
Gut check your risk tolerance.
This literally means considering taking fewer risks with your investments.
Due to the current market volatility, which was partially caused by the war, it might not be the best time to place a large chunk of your portfolio in high-flying stocks like Apple or Netflix if you’re not ready for some risk.
The S&P 500 just had its worst half of the year in more than 50 years, pushing many investors to tweak their investment strategy and include what they consider more stable and safer assets.
Trend number 4: Gold is becoming a contender to traditional currencies and paper assets
With the ongoing crisis (Covid-19, Ukraine war, inflation, recession) most financial assets are seeing their place questioned and reassessed in private and institutional portfolios.
When most portfolios have been focusing on traditional “paper” assets (stocks, bonds, currencies) and new digital ones (crypto, ETFs), a rebalancing seems to be in play towards commodities, energy, and tangible and protective assets such as gold.
Rising inflation, and the looming risk of stagflation should accelerate the trend among investors to get out of inflation-threatened currencies and volatile paper assets, towards more tangible ones that could provide a hedge against those very risks (inflation and economic turmoil).
What does it mean for investors?
New digital tools offer new savings alternatives (crypto, non-bank savings, real estate), and with new digital currencies slowly challenging traditional ones, the ongoing digitalization of physical gold now allows savers and investors to turn their currencies beaten by inflation into a tangible and historically stable investment in a few clicks.
What’s the bottom line?
We got no crystal ball 🔮, but these 4 major trends could mean one thing for the future of gold in the long run:
The current market situation places the precious metal firmly in its rightful place as a tangible portfolio diversifier, inflation hedge, and store of value.
As we said, stagflation can have a negative effect on the stock market and might keep pushing push the value of some of the riskier assets down. At the same time, it has historically worked well or the gold price and the silver price, which are often rising during periods of stagflation.
The war in Ukraine has caused havoc in the global market, pushing up prices of commodities and causing investors to seek protection in gold and precious metals. This created a boom in bullion sales, with many dealers doubling or even tripling their usual sales.
Finally, gold is now rising as a saving alternative to traditional paper assets that have been either hit by market turbulences or lost their purchasing power due to inflation and reckless money printing.
Do you want to know what are the long-term gold price trends? Check out our latest gold price forecast 2022 now.
