Dollar outperforms amid inflation and recession fears
- Gold has long been seen as a hedge against inflation and a safe haven in times of economic instability.
- But despite rising inflation and growing fears of a recession, gold is down 15% since early March and down 5% year over year so far.
- Meanwhile, the US dollar index has jumped 9% since March and is up 11% since the start of the year.
Gold has fallen this year – even with favorable economic conditions for an asset boom – and has underperformed the US dollar.
The precious metal has traditionally been seen as an inflation hedge and a safe haven in times of economic uncertainty.
But despite rising inflation and mounting fears of a recession, gold is down 15% since it jumped to a high above $2,000 an ounce in early March and is down 5% year-over-year so far. Meanwhile, the US dollar index has jumped 9% since early March and is up 11% since the start of the year.
This represents a “moment of truth” for gold, according to OANDA senior market analyst Jeffrey Haley, writing in a recent note to investors that gold was not able to benefit from the dollar’s recent pullback last week.
“To say that gold price action is disappointing is an understatement, and it appears that it faces imminent physical downside risks if the technical picture is to be believed,” he wrote.
With inflation hitting a 41-year high of 9.1% y/y, 2022 should theoretically be the time for gold to shine. Wall Street is increasingly sounding the alarm that the US economy will slip into recession sometime this year or next. But on Thursday, gold hit a 16-month low of $1,680 an ounce.
Meanwhile, the dollar is approaching 20-year highs, benefiting from the Federal Reserve aggressively raising benchmark interest rates. Since March, the central bank has gradually raised interest rates by 25, 50 and 75 basis points. After wrapping up the next meeting on Wednesday, analysts expect another increase of 75 points, or perhaps even 100 points.
In fact, prices are a major driver of gold prices because the metal does not offer a return, which means that gold is negatively correlated with the dollar, according to UBS commodity analyst Giovanni Stonovo.
In certain circumstances, such as times of fear and increased volatility, the demand for safe assets jumps. He added that was when the correlation between gold and the dollar became positive, which is what happened during the 2008 financial crisis.
The dominance of the dollar as the currency of choice for pricing commodities acts as another factor over gold. When the dollar is strong, that tends to put downward pressure on gold prices.
As trends continue, the outlook for gold looks bleak.
“While volatile stock markets and market uncertainty helped gold earlier this year, higher real interest rates in the United States were the main driver affecting gold prices,” Stonovo said by email. “As we see inflation from very high levels and the Federal Reserve tightening its monetary policy, we expect outflows from higher ETF holdings to affect gold prices.”