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What’s driving gold prices? 6 things gold investors should know in 2022

Posted: 25 May 2022 10:30 am
News
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Throughout history, few investments have rivalled gold as a hedge against inflation, making it even more valuable in today's market.



Sponsored by Axi Online Trading (AFSL 318232). The edge for 60,000 traders in 100+ countries across Share CFDs, Forex, precious metals and more. Raw spreads, high liquidity, flexible leverage and ultra-competitive pricing.

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Most economists would agree inflation is back.

As it currently stands in the United States inflation sits at 8.5% over the last 12 months, while in Australia it's 5.1%, although quarterly figures show inflation spiked to 2.1%.

This has led to both Australia's Reserve Bank of Australia, and the US Federal Reserve (the Fed) to lift interest rates this week.

Not only are rates rising, on Wednesday, 4 May, the Fed made the call to lift rates by half a percentage point, its biggest increase since 2000, as America continues to battle inflation.

With inflation at the highest rate in 4 decades, Federal Reserve Chair Jerome Powell sent a message directly to the American people, pointing out the pain caused by rising inflation, while pledging to continue to support them in bringing the price down.

This spiking inflation worldwide has a run-on impact on real asset prices, including shares and property. This is due to a number of factors including the price of debt increases for investors and businesses alike.

As such many have been turning to gold for hedging. To help traders make a more informed decision Finder has partnered up with Axi to talk through some of the benefits gold can have on their portfolio. Axi is a global online broker that provides access to popular commodity CFDs including gold CFDs and oil, along with over 50 share CFDs.

Axi's Market Analyst Milan Cutkovic explains how gold can be used in 2022.

"Gold has a long history and managed to maintain its value all along, and many investors see it as an effective and cost-efficient way of diversifying their portfolio," he said.

Gold can hedge against inflation

Traders have heard this before, but gold can be a hedge against inflation, which in the current environment is incredibly important.

While investors often hold gold as a diversification move, Cutkovic points out it can play a more important role in their portfolio.

"Most investors who own gold do so in physical form (gold coins/bars) or through ETFs (exchanged traded funds), with the purpose of diversifying their portfolio.

"However, gold is also known for its short-term volatility, which presents opportunities for traders who wish to profit from these fluctuations in price," he explains.

Gold can protect you against yourself

Investing is largely a psychological process. Unfortunately, many will buy high and sell low, as the emotions of going through a market cycle impacts their decision making.

Gold can help combat this.

"Investing in stocks can help investors beat inflation.

"However, rather than relying on the stock market alone, which can be very volatile at times, investors are using gold as a hedge. This gives them peace of mind to some extent and can prevent them from making rash decisions and frequent portfolio changes," Cutkovic continues.

More at Axi: FREE Gold trading course.

Gold shines in uncertainty

It should also be noted that gold tends to trade higher during periods of uncertainty.

This means with the current backdrop of geopolitical tensions, including the war in Ukraine, assets such as gold are seeing spikes in demand.

"Gold is also popular during times of uncertainty, such as rising geopolitical tensions," Cutkovic continues.

"As we are currently facing a high inflation rate in most developed economies and an increase in geopolitical tensions, gold has regained its shine."

But even a hedge against inflation faces risks

And while gold is continuing to outperform, it comes with various risks.

Ironically, one of its key drivers, inflation, could also see the price of gold fall. This is because of a strengthening US dollar as rates rise.

Higher rates means investors can take on less risk including buying government bonds or putting their money into a bank account. When enough international investors demand a currency it pushes the price up.

"Gold could face some headwinds due to the strong U.S. Dollar. The Federal Reserve might adopt an aggressive rate-hiking path, which would give the Dollar another boost," Cutkovic notes.

Gold remains under bought

While gold faces headwinds, it could still be a valuable asset for investors today.

"The precious metal doesn't appear overbought from a technical perspective, leaving further room to the upside," the analyst explains.

Gold should remain part of everyone's portfolio

Even during periods of relatively strong economics, Cutkovic reminds investors that gold should remain in their portfolio.

The market analyst notes diversification remains a key part of investing and it's unlikely most retail investors will be able to front run a dip.

"Timing the market is difficult at best, and long-term investors should be more focused on diversifying their portfolio rather than trying to predict the best entry point for buying gold," Cutkovic concludes.

Axi disclaimer: CFDs and Margin FX are leveraged products that carry a high level of risk to your capital. Trading is not suitable for everyone and may result in you losing your initial investment. You do not own, or have any rights to, the underlying assets.”The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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Sponsored by Axi Online Trading (AFSL 318232). The edge for 60,000 traders in 100+ countries across Share CFDs, Forex, precious metals and more. Raw spreads, high liquidity, flexible leverage and ultra-competitive pricing.

CFDs and forex are risky investment products and most clients lose money trading. Consider whether this is right for you before making a decision.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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