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Jul 01, 2022  |  News

Skyrocketing Inflation Hasn't Burnished Gold in 2022

(The Wall Street Journal) Gold is being weighed down by rising bond yields and a strengthening dollar, despite persistent inflation and market turmoil.

Robust inflation and a stock-market rout didn’t do much for gold prices in the first half of the year. Investors don’t expect conditions to improve. 

After gold climbed near records in March, prices slumped over the next three months to their biggest quarterly percentage decline in more than a year. The most actively traded gold futures contract has fallen 7.5% to $1,807.30 a troy ounce, its worst quarter since the 9.5% decline in the period ending in March 2021.

Pressures on gold seem likely to persist in the second half of the year, investors and analysts said. The Federal Reserve has accelerated rate increases to fight inflation. That has lifted government bond yields and the U.S. dollar to multiyear highs, dragging gold down 13% from its 2022 highs. 

Market turmoil, inflation and war are generally expected to boost the price of gold, which is prized for its stability, but investors see the combination of higher yields and a rising dollar as particularly damaging to the metal. Higher rates increase competition from government bonds, which are also relatively stable and offer regular payouts. They also power the dollar, making gold more expensive for overseas buyers. 

“People associate high inflation with a strong gold market, not a weak one. But in reality, what really matters is how central banks or monetary authorities react to said inflation,” said Bart Melek, head of commodities strategy at TD Securities. He expects gold to average around $1,775 in the last three months of the year.

Hedge funds and other speculators have pared bullish futures and options wagers to their lowest levels in months, Commodity Futures Trading Commission data show.

Investors are also yanking money from funds tracking the metal: Precious-metals mutual and exchange-traded funds reported net outflows eight of the past 10 weeks, according to data from Refinitiv Lipper, after 14 consecutive weeks of inflows. 

Gold’s slide has hit shares of mining companies. U.S.-listed shares of Barrick Gold Corp. fell 28% this quarter and Colorado-based Newmont Corp. slipped 25%. Both stocks noted the largest percentage decline since the quarter ended September 2015.

One factor that could help lift gold from its rut: Some investors worry the Fed’s tightening could tip the economy into recession, lowering bond yields and weakening the dollar.

Many also still view gold as a way to protect portfolios against inflation and market swings heading into an uncertain second half. 

“There’s a big conundrum right now of, ‘What are people supposed to do with their money?’” said Bill Herrmann, partner and co-founder at Wilshire Phoenix. He expects gold’s appeal as a haven to propel it toward $2,000 by year-end.

Both stocks and bonds have posted far steeper declines than gold this year. While down from its highs above $2,000, gold remains about 5% above its 52-week low hit in September 2021.

 Peter Cardillo, chief market economist at Spartan Capital, expects it to trade in a range between $1,800 and $1,865 in the next quarter. 

“Gold has really been not performing all that bad,” Mr. Cardillo said. 

Read the article on The Wall Street Journal