Published: 2022.07.30. The price of gold and the problems with the growth of the US dollar

The price of gold and the problems with the growth of the US dollar - Vista previa

By the way, in the financial world, both gold and the US dollar are considered “safe havens” for capital, although the latter this year was clearly in greater demand among investors than the yellow precious metal.
While the dollar index rose in July this year to its highest level in over 20 years, the yellow precious metal posted its lowest price in 16 months, at times under $1,700 an ounce. This may be due to the following reasons.
First and foremost, the early change in US monetary policy strengthened the dollar and weakened the value of gold in response. Thus, in the first six months, the US Federal Reserve has already raised key interest rates three times, increasing their level by a total of 150 basis points.
By comparison, the European Central Bank (ECB) moved from ultra-expansive to restrictive just last week, raising interest rates by 50 basis points. Because ten-year U.S. government bond yields are significantly higher at 2.88% per annum than their counterparts in Germany (1.22%), France (1.8%), or even Greece (1.75%), the dollar’s ​​allure more pronounced than the euro.
Secondly, the military conflict between Russia and Ukraine also leads to the fact that the dollar outperforms the euro and gold. In addition to the still unresolved danger that the war could spread to other European countries, hard economic facts also speak in favor of the dollar. While the US only suffers from rising oil and gas prices, Europeans face massive supply problems - especially in the winter.
Third, because gold pays no interest or dividends, and even incurs costs in safekeeping, the yellow precious metal suffers from the increased opportunity cost of forgoing this income.
At present, despite the highest inflation in the last 40 years, one thing cannot be discounted. The safe harbor argument is far more attractive to the dollar today than it is to the time-tested gold.
However, in the long run, investors should not doubt the protective function of gold. For example, in 2019 and 2020 alone, the price of gold was many times faster than inflation in the US and Germany, showing high annual rates of 18.9% and 24.6% per year, respectively.
At the same time, European gold owners should not complain at all about the performance of gold in their currency, because thanks to the amazing strength of the dollar, they achieved an increase in the value of the precious metal by 2.9% and more than 5% in euros both for the whole of 2021 and from the end of December 2021. to the current moment, respectively.