The value of gold rises and falls like any other investment. While gold will almost certainly never gain or lose its relative value as quickly as penny stocks and dot-com initial public offerings, movements in the price of gold can still convey information. As a result, gold is often considered a hedge against inflation. Inflation occurs when prices rise and, in the same way, prices rise as the value of the dollar falls.
As inflation increases, so does the price of gold. The emergence of compelling and rapidly growing new asset classes, especially cryptocurrencies, has raised questions about the popularity of traditional investments, such as gold. However, George Milling-Stanley, chief gold strategist at State Street Global Advisors, does not believe that the recent correction in the price of gold is a cause for concern, since the Federal Reserve's projections of rising rates are far off. When expected or actual yields on bonds, stocks and real estate fall, interest in investing in gold can increase and drive up its price.
Gold can be used as a hedge to protect against economic events such as currency devaluation or inflation. Since the Federal Reserve seeks to raise interest rates sooner than expected, that means it seeks to control inflation ahead of schedule, and given that gold has historically served as a hedge against inflation, “the market sees this news as negative,” Luke Lloyd, investment strategist at Strategic Wealth Partners in Independence, Ohio, told Forbes. On a positive note, central banks continue to add gold to their reserves, especially Turkey and Egypt. As the end of the current quarter approaches, the Federal Reserve is expected to raise interest rates at its March meeting to cool inflationary pressures, and Teves said that's likely to put pressure on gold.
While gold usually performs poorly in an environment of rising rates, sometimes that correlation doesn't apply. Major players in gold mining around the world include China, South Africa, the United States, Australia, Russia and Peru.
Gold priceshave risen in recent weeks, as investors seek safe havens in fear that Russia will invade Ukraine, but in the long term, Joni Teves of the UBS Investment Bank predicts that the recent strength in gold prices will be short-lived. The dollar is likely to drive up the price of gold due to increased demand (because you can buy more gold when the dollar is weaker).
However, Lloyd believes that the Federal Reserve currently underestimates the impact of inflation and predicts that the central bank will become “more aggressive” over the next year, indicating that interest rate hikes even earlier, perhaps next year, are likely to be negative for gold, meaning he doesn't see the current scenario as a buying opportunity. The price of gold is generally inversely related to the value of the United States dollar because the metal is denominated in dollars. While some ETFs represent ownership of real metal, others hold shares in mining companies instead of real gold. The dollar points to a fall in gold prices, Przemyslaw Radomski, chief executive of investment advisory firm Sunshine Profits, told Forbes via email.
Nowadays, gold is sought, not only for investment purposes and to make jewelry, but it is also used in the manufacture of certain electronic and medical devices.