For the longest time, precious metals such as gold and silver have been in demand during economic upheaval as they allow investors to protect their assets from devaluation. However, recent economic developments have made gold less attractive to investors despite a faltering economy that should have significantly increased the demand for the metal.
This is mainly because moves by the U.S. Federal Reserve and central banks around the world to arrest inflation by hiking benchmark interest rates increased the opportunity cost of holding gold bullion. Furthermore, the fact that gold pays no interest means that investors would not be able to earn interest if they purchased gold.
But in recent weeks, slowing inflation and hope for smaller interest increment hikes by the Fed have caused gold prices to stop their downward trend and stabilize. Despite this rally, you would be forgiven for believing that gold is not a solid investment at this time. The metal saw its value in U.S. dollars go down by up to 12% this year, underscoring just how poorly gold has performed in recent months.
Consecutive interest rate hikes by the Federal Reserve have had a major impact on gold prices, and a surging greenback didn’t help either. Gold prices were especially affected by the increasing value of the dollar, which went up in value by nearly 20% and resulted in a commensurate fall in demand for gold.
Although a more valuable dollar doesn’t have a direct association with gold prices, increased demand for the dollar among inventors reduces their demand for gold, which causes its prices to drop.
Fortunately for gold, the U.S. dollar currency index has been trending downward since it peaked in September, indicating that demand for the dollar may be decreasing. In fact, data shows that demand for the dollar has been reducing since the start of November as U.S. investors turned their attention away from the dollar, leading to a $150 jump in gold prices in the first two weeks of this month.
With some pundits expecting the Fed to loosen its hawkish stance amid slowing inflation, gold prices may trend sideways or even rise further in the near term. Gold prices in 2023 will likely be shaped by differentials in interest rates between the United States and other leading western economies.
Prices may rise if the U.S. economy slows down faster than was predicted as investors seek to earn from the interest rate cuts. In such a case, the stocks of entities such as Newmont Corporation (NYSE: NEM) (TSX: NGT) would be boosted. On the other hand, gold prices may drop if the U.S. economy remains resilient and encourages investors to turn their attention to the dollar.
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