As stocks struggled to rise during the first half of 2022, many investors looked at ways to shore up their portfolios. Bond valuations took a hit owing to the interest hikes. As a result, investors considered commodities and gold trading to preserve value. Gold often remains stable amidst the volatility in the stock market.
It’s normal for gold to provide shelter for weary investors since it remains relatively independent of other asset classes. So, many investors switch to it whenever the United States dollar weakens. Gold also provides a haven during market volatility and high inflation. Regulated brokers recommend sheltering funds using the commodity.
You can invest in gold in one of two ways: investing in a stock of gold mining and processing companies or purchasing gold bullion. With stocks, you can benefit greatly from gold price changes because there’s financial and operating leverage. On the other hand, you can expect a bit more volatility than gold bullion. Unlike gold stocks, bullion relies on the underlying price.
Over the years, the commodity provided shelter during bear markets, posting great returns for investors. However, its performance in other market conditions can be erratic. It differs from other asset classes because it produces no cash flows. Therefore, you can only get the amount the market is willing to pay.
Central banks often boost the gold price when they expand gold reserves during times of economic turmoil. Supply and demand dynamics also push the prices in either direction. Mine production levels and the demand for gold products impact these price movements.
When it comes to long-term returns, gold may not provide dependable performance outside of high inflationary periods and other events. Its inconsistency over longer periods is because it’s not a productive asset. As a result, you’ll more likely see reduced returns. Meanwhile, diversification value is the commodity’s strongest characteristic. Gold comes with reduced correlation to other asset classes, lowering your portfolio’s risk.
By adding the commodity to your portfolio, you cut the risk significantly and benefit from the limited drawdowns. Without it, you get the basic 60/40 portfolio. If you opt for larger commodity allocations, you’re certain to lower the drawdown risk.
Overall, you can leverage gold’s role in portfolio diversification. On the other hand, you shouldn’t expect it to improve risk-adjusted returns. So, it’s prudent to look at the metal as an insurance policy that you use in relatively smaller portions.
While gold has a good track record when it comes to diversification, it struggled to retain its shine in 2022. Despite increased demand as investors sought shelter from the weak stock market, the commodity failed to rise. Its price remained significantly subdued compared to 2021 levels.
Many expected the precious metal to respond positively to market and geopolitical turmoil. Under normal circumstances, these factors and the subdued market sentiment should’ve spurred the gold price. In the 1970s, gold performed well when inflation rose to record levels. Investment experts began touting the metal as the best inflation hedge.
However, it later failed to rise during periods of high inflation in the late eighties and nineties. On the upside, the metal rose in 2008, 2011, and 2020. These periods experienced turbulence for various reasons. Its price peaked in 2020 when the global health crisis rocked the markets. By August 2020, it hit the $2,084 mark.
By 2022, it dropped 18 per cent lower despite a flurry of economic and geopolitical headwinds. Although stock markets can fall, they pay dividends. Gold, on the other hand, only represents a lump sum of redeemable cash. The advantage of this precious metal is that it sets its own rules, giving investors a diversification option.
In the end, investors need to remember that gold offers no price increase guarantees when bonds and stocks plummet.
Looking back at gold’s performance throughout 2022, some analysts believe that the United States dollar has played an integral role as a safe haven asset. Because of this, investors opted for the greenback to achieve higher returns. This trend left the commodity on shaky ground.
Gold will likely strengthen once inflation stabilises, and the U.S. central bank eases its interest hiking plans. It’s no surprise that traders using Metatrader4 track inflation and Fed news to make informed trading decisions.