Without a doubt, 2022 has so far turned out to be very bad for a very large portion of the stocks in investor portfolios around the world. Excluding stocks related to energy commodities and several commodities, mainly fuels and some agricultural products, returns so far in the first eight months of 2022 have been extremely disappointing for a large number of stocks.
The S&P 500 is down nearly 18%, the Nasdaq (filled with high-tech stocks) is down even more, close to 23%. The German DAX 40 index is also down more than 20%. For bonds, needless to say, rising benchmark interest rates and bond yields have delivered the worst year in decades. In the commodity market, the situation has worsened significantly in recent months, with industrial metals not only losing all the gains brought by the great concern immediately after the Russian invasion of Ukraine, but also now posting significant losses compared to the beginning of the year.
In such an environment, an outside observer would expect to see gold emerging as the star of the year, since there are all the elements that theoretically cause strong buying interest in the eternal investment haven: war, intense instability in other regions of the planet, deteriorating relations between the two major powers, the most serious burst of inflation in decades, signs of an impending economic recession and very poor performance for a very large number of investment stocks.
But this has not been done. Despite the upward surge in the price of gold seen as soon as the war in Ukraine broke out sending its price briefly close to $2,000/oz, the expectations created did not materialize. As we speak, gold is near $1,700/oz, about 6.5% below its year-to-date price. Is it reasonable for those who have pinned their hopes on the precious yellow metal to be disappointed?
The answer is easy: no it doesn’t make sense, gold’s behavior is rather normal in 2022. While it is true that there are many factors, such as those we mentioned earlier, which are (in theory at least) very positive for gold, there is one another factor which for the time being neutralizes all others. This is the concerted rise in interest rates, which has started since the first months of the year and continues in most Western countries.
The rise in benchmark interest rates, which causes both government and corporate bond yields to rise and deposit rates to return to positive levels, highlights gold’s Achilles heel, which is its lack of annual return. Anyone who holds gold in physical form receives no annual return, unlike bondholders and depositors. For many years these yields were negligible for both bonds and deposits.
This has been gradually changing since the beginning of the year and is making gold less competitive, while the strong rise in the dollar is not helping the situation, especially for US investors. It is no coincidence that whenever fears of a further rise in interest rates are rekindled, gold automatically retreats. The latest example is given by the behavior of gold in August.
While by the middle of the month it was just above $1,800/oz, from the 15th onwards it began to gradually retreat, coincidentally at the same time that US Treasury yields started to rise as the market caught on to the message from US officials. central bank to continue the policy of raising interest rates. The fall of gold continued even after Governor Powell’s statements last Friday, as did of course the rise in bond yields.
Given the positive background for gold, as we go through a period of uncertainty of all kinds, the question is under what conditions we will see a strong rise in it. The answer is not very easy, but we can speculate that as uncertainty continues at the geopolitical level, any sign of an end to aggressive rate hikes will bring buyers back to gold.
Another version, a little more extreme, is that gold will start to rise very strongly if it appears that the central banks of Western countries are losing the battle against inflation. In such a case, investors will forget the downside of gold (the lack of annual return) and turn to it to protect a part of their wealth. As long as neither of those two things happen, it is likely to continue its troubled path under the weight of rising interest rates and a strong dollar, which has traditionally been the enemy of commodities.
But speaking of the dollar, it is good to point out something quite important, especially for us who have the Euro as our reference currency. If someone bought gold at the beginning of the year, they currently have more euros than they paid to buy it. An ounce of gold was valued at around 1,600 Euros/oz at the beginning of the year and is now close to 1,700 Euros/oz. This means that, even after the decline of the last few days, this investor sees the value of his gold investment increased by 6% when he values it in Euros. So for European investors, in the first eight months of 2022 gold has indeed played the role of a safe haven.