Remember when the gold price stood at US$2,050 per ounce?
That was back on 8 March.
The gold price had already been trending higher in 2022. And the yellow metal received a major lift following Russia's invasion of Ukraine on 24 February, when bullion was fetching US$1,903 per ounce.
Gold, the classic safe-haven asset, historically does well in times of geopolitical unrest and general market uncertainty.
It also has a tendency to outperform in inflationary times. And inflation has been running hotter than at any time in the last 50 years.
Now inflation is still running hot. And it appears it may take some time to get under control. And, tragically, Russia's war in Ukraine continues, also with no likely near-term end in sight.
With these economic and geopolitical tailwinds behind it, why has the gold price dropped to US$1,697 per ounce?
The US Federal Reserve, China and Russia
The primary factor working against a rising gold price appears to be the massive turnaround we've seen from the US Federal Reserve this year.
From near-zero interest rates and massive quantitative easing (QE), the Fed is determined to get inflation under control by ending its bond purchases and ratcheting up interest rates.
While other central banks, including the Reserve Bank of Australia (RBA), follow suit, the US dollar has charged higher this year. On 1 January, the Aussie dollar was worth 73 US cents, hitting 75 US cents on 4 April. Today the Aussie dollar is trading for 68 US cents.
When the US dollar gets stronger, gold prices historically fall.
Higher interest rates also reduce the appeal of holding bullion, which pays no yield. Today's gold investors are looking at a very different picture than they were at the end of 2021, now with the option of earning higher returns from cash holdings or bonds.
Then there are the COVID lockdowns, and mounting debt bubble concerns out of China, the world's number two economy, likely to be dragging on investor sentiment in the gold sector.
Indeed, according to data from the World Gold Council, global gold exchange-traded funds (ETFs) registered outflows of 81 tonnes, or some US$4.5 billion, in July. That's the third month of outflows in a row, representing the worst run since March 2021.
There has also been some concern that Russia may sell its roughly US$140 billion stockpile of bullion to stave off the impacts of sanctions. Sales which would pressure the gold price.
However, most analysts don't believe that's likely or viable. Sanctions make it difficult for Russia to do so, and any companies assisting Putin's government would face reputational damage.
According to Fergal O'Connor, a lecturer at Cork University Business School (courtesy of Bloomberg), "This is why they bought their gold; it was for a situation just like this. But if no one will trade it with you, it doesn't matter."
Citigroup said that Russia could sell its gold domestically to buy rubles if the government gets desperate for funds, setting up what would be equivalent to an internal gold standard.
"If things get worse, you could basically re-anchor to a pile of gold. You need an anchor in situations like this," Credit Suisse Group AG strategist Zoltan Pozsar said.
How has the gold price tracked compared to other investments?
The gold price kicked off 2021 trading for US$1,801. At the current US$1,697 per ounce, that's down 5.8% year-to-date.
The S&P/ASX 200 Index (ASX: XJO), populated by venerable blue-chip companies, has lost a good bit more, down 9.8% this calendar year.
Growth shares, like tech stocks, have had a far more difficult run, with the S&P/ASX All Technology Index (ASX: XTX) down 29.4% in 2022.
As for the gold miners, they've lost far more than the gold price, with the S&P/ASX All Ordinaries Gold Index (ASX: XGD) down 28.6% this year.
And we'll leave off with Bitcoin (CRYPTO: BTC), touted as a potential digital alternative to bullion. The world's top crypto is down a painful 58% in 2022.
So, although the gold price isn't shooting the lights out, bullion is holding its value better than most asset classes this year and with historically low levels of risk.
