This week, gold dropped to a 2-month low under the pressure from a stronger US dollar. Yet, the precious metal still retains high upside potential. Let's find out why.
Gold recovered slightly on Thursday after the quotes broke through the key mark of $1,900 a day earlier and rushed to the downside. June futures rose by 0.1%, or $2.60, yesterday. However, they still failed to overcome the important psychological level. At the close of the session, they traded at $1,891.30.
The yellow asset was supported by the GDP data in the US for the first quarter. A record trade deficit, cuts in government spending, and declining inventories resulted in a 1.4% drop year-on-year.
The US dollar remains the major limiting factor for gold. The American currency continues its unprecedented rally, destroying everything on its way.
In recent trading, the US dollar index jumped to a 5-year high. The greenback strengthened considerably against the yen and the euro.
The Japanese currency fell sharply after the BOJ decided to keep the government bond yield at 0.25% through buying an unlimited amount of 10-year bonds.
Unlike the Bank of Japan, the US Federal Reserve is tightening its monetary policy. Markets now expect the US regulator to raise the rates by half a percentage point at its meeting in May.
The hawkish stance of the Fed stimulates the growth of government bond yields, which has a positive effect on the US dollar and an opposite effect on gold.
In addition, recently, gold has been losing the battel to the greenback for the status of the best safe-haven asset.
The escalation of the Russian-Ukrainian conflict, as well as the outbreak of COVID-19 in China, forced investors to flee from risk assets this week. However, gold has hardly benefited from the falling stock market. The dollar turned out to be the only winner here.
Nevertheless, the precious metal is still attractive to investors. On Thursday, the World Gold Council said that gold demand increased by more than 30% in the first quarter compared to the same period in 2021.
Now, the long-term outlook for gold seems rather optimistic. According to experts, there are 3 reasons why gold can show a steady uptrend this year.
Inflation
Analysts at Scotiabank expect that the ongoing conflict between Russia and Ukraine will lead to an even greater rise in commodity prices.In particular, the widespread increase in oil prices will keep inflation high in many countries of the world, including the United States.
Despite the fact that the US has already embarked on the path of monetary tightening, there is a big risk that the Fed is already late to tackle inflation on time.Record-high inflation in the US will not allow gold to stay below $1,900, Canadian experts say. They have raised their mid-year forecast for the precious metal from the previous estimate of $1,800.
Resilience
Another positive aspect is the fact that gold has managed to rise in 2022 despite an increasingly hawkish outlook for the Fed's policy.Since the beginning of the year, the precious metal has appreciated by 3.6%. By contrast, Bitcoin has fallen by 13% over the same period, while the NASDAQ stock index lost around 19%.
Apart from the geopolitical factor, the main cryptocurrency and stock indices also declined on expectations of a more aggressive policy by the Fed. Meanwhile, gold prices have barely reacted to the macroeconomic background and remained relatively stable.
Supply reduction
Also, the value of the precious metal may rise amid reports about supply reduction.Last year, the supply fell by 1% due to a sharp drop in recycling which more than offset higher mine production.
Historically, a drop in supply (for example, between 2000 and 2008) has always preceded a multi-year bull run in the gold market. Therefore, the long-awaited big rally of the precious metal is yet to come.
